2008/137/EC: Commission Decision of 7 March 2007 — State aid C 10/06 (ex N555/05) — Cyprus Airways Public Ltd — Restructuring plan (notified under document number C (2007) 300) (Text with EEA relevance)
Date: 2007-03-07
Institutions: European Commission
Subjects: Cyprus, State aid, aid to undertakings, air transport, application of EU law, control of State aid

22.2.2008

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Official Journal of the European Union

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COMMISSION DECISION

of 7 March 2007

State aid C 10/06 (ex N555/05) — Cyprus Airways Public Ltd — Restructuring plan

(notified under document number C (2007) 300)

(Only the Greek version is authentic)

(Text with EEA relevance)

(2008/137/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(5)

Having regard to the Treaty establishing the European Commu-
nity, 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 provision(s) cited above (1),

Whereas:

I.

PROCEDURE

(1) On 3 May 2005 the Commission decided to authorise
for Cyprus Airways Public Ltd.

rescue aid (N69/2005)
(Decision 2005/1322).

(2)

registered by the Commission on
By undated letter
9 November 2005 (DG TREN A/28405) in accordance
with Article 88(3) and with undertakings given in the
context of the notified rescue aid referred to above, the
Cypriot authorities notified the Commission of a restruc-
turing plan for Cyprus Airways Public Ltd. On 14 Novem-
ber 2005 the Secretariat General of
the Commission
registered the notification under reference SG(05)A10041
and the case was given the number N 555/2005.

(3) On 18 November 2005 (D(05)125084) the Commission
asked the Cypriot authorities for additional clarifying
information. The Cypriot authorities answered the Com-
mission's questions by letter dated 23 January 2006,
registered on 24 January 2006 (under reference DG TREN
A/11819). On 14 December 2005 a meeting took place in
Brussels between representatives of the Republic of Cyprus
and the Commission. A subsequent high-level meeting took
place on 30 January 2006 in Brussels to discuss progress
on the case.

(4)

By decision of 22 March 2006, notified to the Cypriot
authorities by letter dated 23 March 2006 (SG-Greffe
(2006) D/201246), the Commission initiated the procedure
laid down in Article 88(2) of the Treaty. The procedure has
been registered under C 10/2004.

The Commission decision to initiate the formal investiga-
tion procedure was also published in the Official Journal of
the European Union (2). The Commission invited interested
parties to submit their comments on the subject. Cyprus
forwarded comments to the Commission by letter dated
20 April 2006.

(6) Within the timeframe provided for

in the published
opening of procedure,
the Commission received one
comment from interested parties. This comment was then
submitted to the Cypriot authorities (D(2006) 213376) for
their observations and the observations of Cyprus were
received on 28 July 2006 (registered on 1 August 2006
under
reference A/28810). Further clarifications were
received from the Cypriot authorities by fax dated
19 December 2006 (registered on 31 December 2006
reference A/40766). Further clarifications and
under
commitments were received by fax on 28 February 2007.

II.

THE FACTS

(7) Cyprus Airways Public Ltd.was established in 1947 as a
public company, its principal activities are the transporta-
tion by air of passengers and cargo and other airline related
services. The main shareholder of
the company is the
Cyprus government (69,62 %) while the balance of the
shares is held by some 4,200 small private investors.

(8) Cyprus Airways Public Ltd. (hereinafter Cyprus Airways) is
part of the Cyprus Airways group (hereinafter the Group).

(9) Cyprus Airways currently provides scheduled services in
Europe and the Middle East operating a fleet of 11 aircraft,
two A319 delivered in 2002 owned by Cyprus Airways;
seven A320–200s delivered between May 1989 and March
1993; owned by Cyprus Airways; one aircraft of which was
previously wet-leased to Eurocypria and two A330-200,
delivered in 2002 & 2003 (leased).

(1) OJ C 113, 13.5.2006, p. 2.

(2) Cf footnote 1.

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(10) At the time of notification of the restructuring plan the
other companies within the Group, all 100 % owned by
Cyprus Airways Public Ltd were:

The long-term loan of CYP55 million (€96 million) and cost
cutting measures

E u r o c y p r i a A i r l i n e s

(11) This company (hereinafter Eurocypria) operates charter
flights from over fifty European airports, Eurocypria's fleet
is composed of five aircraft, four leased Boeing 737-800,
acquired between February and April 2003 each with a
capacity of 189 passengers as well as an A320 aircraft
(A320) on ‘wet lease’ from Cyprus Airways.

(16) The central plank of the restructuring plan is a loan on
commercial
terms with a guarantee from the Cyprus
government for a ten year period, and will in the first case
be used to repay the short-term loan of CYP 30 million
(EUR 51 million) made following the rescue aid approval in
May 2005. Thereafter
the balance will be used to
restructure the airline.

H e l l a s J e t S A

(17)

(12) Hellas Jet SA (hereinafter HellasJet) was incorporated in
Athens on 1 July 2002 beginning operations on 24 June
2004. Hellas Jet was conceived as a new Athens-based
European airline. It operated three leased Airbus A320s
based at Athens International Airport. However, business
plans were not met and scheduled operations were
suspended as of May 2005. The results of this venture
were therefore financially damaging, costing the Group an
accumulated amount of CYP 29,5 million (EUR 51,4 mil-
lion) as of June 2005.

Z e n o n N a t i o n a l D i s t r i b u t i o n C e n t r e L t d .

to Cypriot

(13) This subsidiary company (hereinafter Zenon) provides
services
travel agents. Specifically, Zenon
provides and distributes electronic information that allows
travel agents to make air seat reservations and ticketing as
well as hotel and car reservations.

C y p r u s A i r w a y s ( D u t y F r e e S h o p s ) L t d .

(14) This company commenced its operations in 1996 when it
took over the operation of the Duty Free Shops in Larnaca
and Paphos airports. At the time of notification of the
restructuring plan it was intended that the Duty Free Shops
at Larnaca and Paphos airports will be taken over by the
new airport concessionaire and no longer form part of the
Group. This happened in June 2006.

In the first 24 months of the restructuring plan the main
focus was to be on cost cutting and selected revenue
enhancement. The government and management estimated
that total costs needed to be reduced by 13 %. This was to
be achieved by cutting staff numbers by some 20 % and at
the same time reducing salary levels by an average of 15 %.
This means that of a staff of 1 840 as of 1 September 2005,
385 were to be made redundant under the restructuring
plan; these redundancies were to lead to annual savings of
approximately CYP 7 million (EUR 12 million); further
economies of some CYP 4,6 million (EUR 8 million) will be
cut from ongoing staff costs.

(18) The Commission expressed doubts regarding whether the
plan would restore the long-term viability of the company
in the shortest possible time and without need for
additional aid in the future. It also stated that it did not
have enough information to be able to take a position on
whether the amount of the aid element of the restructuring
plan has been kept to a minimum. The Commission also
questioned the need for the long-term loan to be paid off
over 10 years. The Commission said that it did not have
the financial
enough information to be able to say if
projections are reasonable or if the assumptions on which
these are based are valid and it would be particularly
interested in having the opinion of Cyprus Airway's
competitors on the plan.

Sale of Eurocypria

III.

THE OPENING OF PROCEDURE

(15) The decision of the Commission to open the procedure
provided for under Article 88(2) was based on a number of
issues arising from its examination of the restructuring
plan. The Commission expressed doubts as to whether the
plan was compatible with the applicable community
framework,
i.e. the Community guidelines for the State
aid for the Rescue and Restructuring of Firms in Difficulty
of 2004 (3) (hereinafter the R & R guidelines).

(3) OJ C 244 1.10.2004 p. 2.

(19) The restructuring plan envisaged the sale of Eurocypria, the
charter subsidiary of Cyprus Airways to the government at
a price to be determined by an independent expert. The
price was initially estimated at CYP 15 million (EUR 26 mil-
lion). Eurocypria would therefore be separated from the
Cyprus Airways group and operated as a completely
distinct entity. The proceeds of
the sale (paid by the
government to Cyprus Airways) would be used by the latter
to fund its restructuring. The Commission expressed doubts
regarding the sale and how the sales price would be arrived
at. If the price paid for Eurocypria were not to be a market
price then it would be State aid.

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Capital increase

The long-term loan of CYP55 million (€96 million) and cost
cutting measures

(20) A further part of the restructuring plan, intended to take
place 18 months after the plan has been initiated is a capital
increase of CYP 14 million (EUR 24 million). All
shareholders (State and private shareholders) will partici-
pate in proportion to their shareholding. The State will put
up CYP 9,8 million (EUR 17 million) while the private
shareholders' contribution in this capital increase will be
around CYP 4,2 million (EUR 7,3 million). In opening the
procedure the Commission indicated that it could not
exclude that the State participation in this capital increase
could amount to State aid.

Compensatory measures

(21) The Commission expressed doubts as to whether

the
compensatory measures proposed in the restructuring plan
would be sufficient to remedy the market distortion caused
by the aid. The plan included relatively small reductions in
the fleet and route network for Cyprus Airways. The charter
arm Eurocypria was to be sold off and another subsidiary
HellasJet was to be closed down and its three aircraft
released. The Commission expressed doubts in particular as
Eurocypria was to be sold to Cyprus Airway's principal
shareholder. The Commission invited comment
from
Cyprus Airway's competitors in this regard.

Own contribution

(22) Normally with a company of the size of Cyprus Airways
the level of own contribution to the restructuring costs
should be in the order of 50 %. The Commission expressed
doubts regarding the level of own contribution and as to
what
should be considered as constituting an own
contribution.

IV.

COMMENTS RECEIVED DURING THE PROCEDURE

Initial comments of the Cypriot authorities

(24)

In relation to the issues concerning the restoration of long-
term viability of Cyprus Airways, the restructuring plan
provided that the restructuring costs (financed by the long
term loan of CYP 55 million as well as the proceeds of the
sale of Eurocypria were to be spent as follows

Period

Sum

(CYP
million)

Description

2006

2006

2006

2006-2008

30

Repayment of rescue aid

10,6

Redundancy payments

2

5

Other redundancy costs

Working capital for Cyprus Airways

2006-2008

13,5

Predicted capital expenditure

2006-2010

10

Cash flow deficits

Total

71,1

(25)

In relation to the future operation of the company, both the
Cypriot authorities and the airline have acknowledged that
the strategic and operational model that served Cyprus
Airways in the past is not sustainable in the competitive
environment where the company operates today. The basic
misalignment lies in the fact that Cyprus Airways operates
at a cost level of a fully fledged network carrier while the
reality of the liberalized leisure-dominated Cyprus market
only allows for revenue levels which are at par with those of
charter and/or low cost airlines, which are in fact Cyprus
Airways' real competitors.

(26)

In the current business environment and given the full
liberalisation of the air transport market in Cyprus, Cyprus
Airways has only limited options for further growth or
revenue enhancement. Even the predicted growth in the
aviation market of over 4 % would not allow Cyprus
Airways to get out of its current difficult situation without
additional action. Therefore the company has undertaken a
hard restructuring in which drastic
cutting is
unavoidable.

cost

(23) The Cypriot authorities replied to the opening of procedure
by seeking to clarify certain issues raised by the Commis-
sion.

(27)

In the restructuring plan the company had estimated that
total costs need to be reduced by 13 %. This was to be
achieved by cutting staff costs by around 20 % and at the
same time reducing salary levels on average by 15 %.

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Official Journal of the European Union

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(28)

In addition to this cost cutting the company has to undertake other elements of the restructuring plan
which is ongoing and which argues at this early stage for the long term viability of the company. It is now
intended that the company will be in a position to successfully reposition itself in a manner that would
allow the airline to survive and create an acceptable Return on Investment (ROI) in the medium term,
without any further subsidy or aid. It is intended that during 2007 that a second round of cost cutting
will be undertaken, focusing on outsourcing and industry best practice.

Profit and loss evolution Cyprus Airways (forecast) (*)

CYP 000s

2004

2005

2006

2007

2008

2009

2010

Total revenues

Total costs

Operating Result

Profit (loss) before tax

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(29) The future turnaround of the airline is based on consolidating the benefits accruing from these reduced
costs and steadily growing the airline. In this respect the restructuring plan foresees passenger traffic
evolution for the period 2004-2010 as follows

Cyprus Airways Passenger Traffic evolution (forecast) (*)

2004

2005

2006

2007

2008

2009

2010

Overall Cyprus traffic
(millions)

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CY traffic (millions)

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CY market shares

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Sale of Eurocypria

(30)

In relation to the sale of Eurocypria, the government clarified that in addition to the evaluation
previously carried out by PricewaterhouseCoopers on behalf of Cyprus Airways to establish a market
price for Eurocypria a second valuation on behalf of the government had been commissioned from
HSBC to determine a sales price under well established and accepted methodology. The sale of
Eurocypria to the State would therefore be carried out at arms length.

(31) PwC have carried out a valuation of the company using the Discounted Cash Flow (DCF) methodology
and comparing the implied valuation multiples to the market approach they have also taken into
consideration transactions involving the purchase and sale of comparable companies in the industry.

(32) PwC report that the revenue of the company is derived from the sale of aircraft seats to tour operators,
the total of passengers carried in 2005 amounted to 662 561 and this is expected to increase to 829 092
during 2006, it should be noted that the forecasted revenue for 2006 has already been contracted. The
major components of operating costs for 2005 were aviation fuel (30 %) aircraft lease rentals (22 %)
airport and en-route costs (15 %) crew costs (11,5 %) and maintenance/engineering costs (9,5 %).

(*) Business secret.

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Key performance indicators

2004 (1)

2005 (2) M

2006 (3) E

2007 E

2008 E

2009 E

Total flights operated
Passengers carried
Total income (CYP
000s)
Gross profit (CYP 000s)
Operating profit (loss)
(CYP 000s)
Profit (loss) before
taxation (CYP 000s)

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(1) Audited financial statements.
(2) M = management accounts, not yet audited.
(3)
E = Estimated.
(*) Business secret.

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(33) For the financial year 2005 Eurocypria anticipated a profit
in the region of CYP 440,000 this amounts to a drop in
performance compared to previous years and to the
projected figures due to a steep increase in fuel prices
experienced in 2005 which could not be passed on to
passengers due to the nature of the agreements with tour
operators.

(37) On the basis of the analysis described above PwC arrived at
an indicative range of values for Eurocypria of between CYP
12,5 million to CYP 16 million.

(34) The DCF method gives an indication of the value of a
business based on the value of the free cash flows that the
business can be expected to generate in the future, it is
designed to find the present day value of future cash flows
arising to investors,
the resulting cash flows must be
discounted at the required rate of return to arrive at an
estimate for the present value of the business.

(38) PwC have also carried out a market comparable analysis of
the value comparing Eurocypria with other companies in
similar lines or similar types of business. This is considered
as a valid additional comparison method as the conditions
and prospects of similar businesses depend on common
factors such as overall demand for their products and
services as well as cost structure and operating environ-
ments.

(35) Four year (2006-2009) financial projections were prepared
by the management of Eurocypria, these provided for a
‘terminal value’ of the company representing the amount
that an investor would pay today for the rights to the cash
flows of the business for years subsequent to the four year
projection. A terminal value of CYP 14,54 million was
arrived at; this was then discounted by a ‘weighted average
cost of capital’ of 9,35 % to arrive at a ‘net present value’ of
the company of CYP 14,21 million.

(39) Owing to the lack of publicly quoted charter airline
companies PwC used a mix of low cost carriers and mixed
scheduled and charter carriers. A calculation made on the
basis of the current and projected earnings before interest,
led to an
tax, depreciation and amortization (EBITDA)
indicative value of the company's equity of between CYP
12,5 and CYP 13,5 million. PwC note that this result
converges towards the result of the DCF methodology.

(36) This net present value was then subject to a number of
sensitivity analyses to take account of possible varying
parameters such as differing USD/CYP exchange rates,
(many of the company's costs are in US dollars while its
earnings are in other currencies) differing growth prog-
nostics and differing fuel prices. The sensitivity analyses
highlighted the high sensitivity of Eurocypria (in common
with most Community airlines) to fluctuations in exchange
rates and fuel prices.

(40) PwC have also carried out a third and final valuation of
Eurocypria based on recent transactions, in their view this
to the two previously
applies a reasonableness
test
mentioned methodologies. The
this
approach is that the price achieved at arm's length between
a willing buyer and a willing seller is a good indicator of
value. PwC have made use of data available to their global
network and have come up with an indicate value using this
method of approximately CYP 10,5 to CYP 13 million for
Eurocypria. PwC point out that this result also converges
towards the result of the DCF methodology.

theory behind

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(41) Accordingly and on the basis of the analyses mentioned
above, PwC reach the conclusion that the indicative value
for Eurocypria in the range CYP 12,5 to CYP 15,5 million.

(42) PwC also add that their valuation of the Eurocypria is based
on financial projections for the company where Eurocypria
would retain some type of affiliation with Cyprus Airways.
According to PwC, such an affiliation would give rise to
certain hindrances to expansion most notably; restrictions
on growth due to the fact that Eurocypria is a subsidiary of
Cyprus Airways; Eurocypria's status as a subsidiary of
Cyprus Airways limits its possibilities to achieve competi-
tive pricing with respect to outsourcing of services.
If
Eurocypria were to stay part of the Group it is also likely
that it could not compete on the same routes with Cyprus
Airways.

(48) The Cypriot authorities also contend that the decision to
sell HellasJet and the decision not to renew HellasJet's leases
on three leased aircraft constitutes a significant Group
capacity reduction which should be seen as a compensatory
measure. Similarly the sale of Eurocypria as the Group fleet
will be reduced by 6 further aircraft, after the sale the two
companies would be legally and financially independent.

(49)

restructuring for

In the view of the Cypriot authorities there is no further
scope in this
further compensatory
measure which would not risk imperilling the object of
the restructuring. The Cypriot authorities stress that Cyprus
Airways is a very small player in the Community aviation
market and its actions are unlikely to influence the
competitive situation in this matter.

(43) On this basis PwC conclude that the price for Eurocypria as
a separate entity free of these restraints could probably be
higher.

(44) A second evaluation has been carried out by HSBC. HSBC
have adopted a similar approach to that carried out by PwC.
Their initial conclusion is that Eurocypria has a total equity
value of CYP13 million. HSBC have then carried out a
comparative value assessment looking at publicly quoted
companies which are comparable to Eurocypria,
in so
doing they have arrived at a valuation of CYP 11,8 for
Eurocypria.

(50) The Cypriot market, which is mainly a destination market
has been liberalised for some time and currently some 99
airlines operate scheduled and charter services in to and out
of Cyprus. On closer examination 80 % of traffic is intra-
Community/EEA and therefore not subject to restrictions of
any kind. A further 8-9 % is made up of charter services
from third countries which are fully liberalised. The
remaining 10-11 % is made up of traffic from the Middle
East and Gulf regions where the aero-political context is
driven by bilateral arrangements between Cyprus and these
countries. In this context the Cypriot authorities feel that
there is very limited scope for further liberalisation of the
Cypriot aviation market on the basis of actions taken at the
national level.

(45) HSBC refer to the sensitivity of the company in particular
to variations in fuel pricing and arrive at a weighted average
value of the company in the range of CYP 12,3 to CYP
13,8 million.

(51)

Capital increase

(46) With regard to the capital increase, this would be designed
to address the negative net worth arising from accumulated
past losses which have eroded Cyprus Airway's equity. The
equity increase will be made by way of a rights issue which
will be offered pro-rata to the shareholders with 70 % being
offered to the State and 30 % to the private shareholders. In
the opinion of the Cyprus government this equity increase
will be an investment similar to that made by a market
economy investor.

Compensatory measures

(47) On the issue of compensatory measures the Cypriot
authorities reiterated their view that the airline has in
effect been restructuring its operations since 2004. In this
respect at the end of 2004, the airline reduced its fleet by
two aircraft and gave up a number of routes while at the
same time reducing its frequency on other routes. In the
context of a 12 aircraft airline in 2004 this reduction was,
in their view, very significant and a further reduction in size
at this stage would have a negative impact on the airline's
long-term viability.

Own contribution

In relation to the issue of own contribution the Cypriot
authorities wished to clarify on a number of issues. In
relation to the Cyprus Airways owned fleet, the company
had not been able to place its aircraft as security against
borrowing from commercial banks due to the relative age
of the aircraft (the 7 A320 aircraft owned by Cyprus
Airways were delivered to the company between 1989 and
1993). Efforts had been made in this regard and the replies
received from a number of commercial banks had been
negative. In similar vein the government explained that the
sale of part of the fleet was not considered as a real
alternative as this would render the company incapable of
continued operations. The only real alternative therefore
was the sale of Eurocypria and they argue that the sale of
this subsidiary should be regarded as an own contribution.

(52)

In relation to HellasJet this company ceased operations as a
scheduled airline in May 2005 and transformed its business
from a scheduled carrier to an aircraft broker and charter
operator by entering into an agreement with a Greek
company called Trans World Aviation. 51 % of the equity of
the company had already been sold and the government
were in negotiations to sell the rest of the company.

(53) The Cyprus authorities also consider

the capital
an own
increase planned for mid-2007 constitutes
contribution to the restructuring. In their opinion should

that

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be added the sale of an aircraft in 2005 (CYP 5 million), the
sale of a spare A320 aircraft engine (CYP 1,7 million) and
the sale of spare parts (CYP 0,7 million), leading to a further
contribution of CYP 7,4 million.

(61) PASYPI point out that the private shareholders of

the
company do not contribute to its survival and that the only
stakeholders who contribute to the reduction in costs are
the employees.

(54) Finally, in relation to the level of own contribution to the
restructuring the Cypriot authorities draw the attention of
the Commission to point 56 of the R & R guidelines which
provide

‘In assisted areas, however, and unless otherwise stipulated
in rules on state aid in a particular sector, the conditions for
the
authorising aid may be less
implementation of compensatory measures and the size of
the beneficiary's contribution’

stringent as

regards

(55) They go on to point out that for the period 2000-2006 that
the whole of Cyprus is considered as one region falling
under Article 87(3)(a) of the EC Treaty, and that Cyprus
Airways
is particularly valuable to the tourism-based
economy of Cyprus and further capacity reduction in the
airline either through further compensatory measures or
through an extremely high proportion of own contribution
is bound to have far reaching repercussions on the tourism
sector and on regional development generally.

Third party comments

(56) Following the publication of the letter addressed to the
Cypriot authorities in the Official Journal comments were
received from one interested party within the time allowed.

(57) The Commission notes that no competitor submitted
comments within the context of the opening of procedure.

PASYPI

(58) The Comment was received from the Pancyprian Airline
Pilots Union (PASYPI), who wished to give their opinion on
the restructuring plan for Cyprus Airways and on the
proper and efficient management of the company. They
expressed the opinion that if the current restructuring plan
was to be approved under the ‘prevailing management
thinking’
the
company.

this might be ‘very disastrous’

that

for

(59)

In the opinion of PASYPI Cyprus Airways had not
presented a proper and viable business plan to its
employees since the Commission had authorised rescue
the
aid for
management or the operations of the company had taken
place and this was due to political interests and interference.

the company. No restructuring of either

(60) The union assert that the airline is overstaffed and that
plans put in place by the company management had failed
to reduce the number of staff to staffing levels consistent
with international standards and benchmarking, political
pressure and considerations were cited as reasons for this
failure.

(62) The pilots' union also criticises the company management
in relation to the treatment of two subsidiaries Eurocypria
and HellasJet.
In relation to Eurocypria they question
whether the sale of this company will have adverse effects
and limitations on the future of and expansion of Cyprus
Airways. With respect to HellasJet the union takes issue
with the fact that the management has never revealed to the
staff
the losses incurred by HellasJet and whether this
company is still operating.

(63)

In conclusion the pilots' union states that there is a need for
a new business plan for the airline and that the airline needs
to be privatised.

Reply of the Cypriot authorities to the Third Party
Comment

(64) The Cypriot authorities reply to the comments received
the
from the pilots' union was firstly to assert
statements made were neither substantiated nor based on
any solid business rationale or background.

that

(65) The government firmly refutes the allegation of political
interference in the company and stated that while the
majority of the Board are appointed by the government that
these members have the same responsibilities as those of
the Board members of any publicly listed company. The
decisions taken by the Board are motivated only by the
company's best interests.

(66)

In relation to the restructuring plan the government states
that this was being implemented and that change within the
company was already visible. Savings on an annual basis
were in line with those foreseen by the plan at CYP
19,5 million. The core of the plan is to reduce costs so as to
give the airline the ability to restructure its operations more
competitively. As labour costs were a significant factor this
has meant that the staff had been unavoidably affected
either through redundancy or through reduced earnings.

(67) With regard to the issue of overstaffing the government
rejects the allegations made by PASYPI and states that the
number of staff to be made redundant due to leave the
company by the end of 2006 is approximately 414 rather
than the 385 persons envisaged in the restructuring plan.

(68) Concerning the increase in capital, the government explain
that this will take place in mid-2007 when tangible results
from the implementation of the restructuring plan are
the ratio of private/public
evident.
shareholding in the company will be maintained.

is intended that

It

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(69) The government explained that the sale of Eurocypria was
the own
taken to enable Cyprus Airways
contribution requirements of
the Community R & R
guidelines. They stated that that the sale of Eurocypria at an
independently evaluated price of CYP 13,425 million was
to take place in early August 2006.

to meet

(70)

In relation to HellasJet
the government explained that
following a tripartite agreement between Cyprus Airways,
HellasJet and Trans World Aviation SA (trading in Greece as
Air Miles) Cyprus Airways had arranged for the sale of
HellasJet
to Trans World for EUR 2 million (CYP
1,16 million). They stated that Cyprus Airways's intention
had been to mitigate as far as possible the operating losses
of HellasJet and to extract itself from this venture once the
corporate guarantees previously provided by Cyprus
Airways in connection with HellasJet's fleet had expired
and argued that this sum should be considered as an own
contribution.

then have to be ratified by the District Court in Cyprus and
registered with the Registrar of Companies. The whole of
this procedure is expected to take 6-7 months (allowing a
three month period for the Court).

V.

APPRAISAL OF AID

Existence of aid within the meaning of Article 87(1) of
the EC Treaty

(75) By virtue of Article 87(1) of the EC Treaty, any aid granted
by a Member State or through State resources in any form
whatsoever, which distorts or threaten to distort competi-
tion by favouring certain undertakings or the production of
certain goods, shall, in so far as it affects trade between the
Member States, be incompatible with the common market.

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

indirectly,

(71) The government rejected the pilots' union call for a new
restructuring plan and affirm that the current business plan
does not require any revision. The government do not
exclude the possibility of privatising the company should
an attractive offer be made.

(77)

In the context of the opening of procedure the Commission
identified three elements of the restructuring plan which
could potentially amount to state aid, the Commission
must therefore examine these elements to determine if
these constitute State aid.

(72)

the request of

the Commission,

In relation to the capital increased planned for mid-2007
the Cypriot
and at
authorities provided further information by letter dated
19 December 2006. They explained that according to the
provisions of Cypriot company law a public company may
not issue shares below nominal value. As Cyprus Airways
shares were at that time being traded on the Cyprus Stock
Exchange at a value in the range of CYP 0,15-0,16 while
they had a nominal value of CYP 0,50 per share. As it was
felt that any issue at or above par value would be successful
it would be necessary to reduce the nominal value of the
share capital.

(73) The procedure for the reduction of nominal share capital
has already been undertaken and the company will reduce
this value by writing off accumulated losses (as permitted
by the Company's articles of association). The Board of
Directors of Cyprus Airways in its meeting of 12 December
increase by
2006 began the procedure for the capital
organising the underwriting of the issue. To guarantee its
success a commercial investment bank Cisco (a subsidiary
of the privately-owned Bank of Cyprus) has indicated its
willingness to underwrite the proposed issue. Cisco will be
paid a fee for underwriting the Cyprus Airways' capital
increase and this fee will be at market price for such
transactions. A copy of the letter of intent of the investment
bank has been furnished to the Commission services.

(74) The next steps were that in mid-January 2007 a Special
Resolution for the Reduction of
the share capital was
approved by a 75 % majority of the shareholders preset at
an extraordinary general meeting. Such a resolution would

Loan Guarantee

(78) The restructuring costs of Cyprus Airways will be partially
and temporarily covered by a CYP 55 million (EUR 96 mil-
lion)
loan granted by a commercial bank at market
conditions. As explained in the decision to open the
investigative procedure, the Cypriot authorities intend to
grant to Cyprus Airways a State guarantee covering this
loan.

(79) The Commission Notice on the application of Articles 87 and 88
of the EC Treaty to State aid in the form of guarantees (4) sets
out criteria which ensure that a guarantee does not
constitute State aid (see paragraph 4.2). Two essential
cumulative conditions are:

a)

The guarantee could in principle be obtained at
market conditions from the financial markets.

b)

The market premium for the guarantee is paid.

(80)

In the present case neither of these criteria is fulfilled,
Cyprus Airways does not pay the state any premium for the
guarantee it benefits from and, given its parlous economic
situation and the fact that it had already received rescue aid,
it is very unlikely that the company would have received
such a guarantee on its own.

(81) Furthermore, the guarantee is one of State resources as it is
granted directly by the State. It is directed at one company
(Cyprus Airways) which is in competition with other
Community airlines in particular since the entry into force

(4) OJ C 71, 11.3.2003, p 14.

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of the third stage of liberalisation of air transport (‘third
package’) on 1 January 1993. It will affect inter-state trade
since it concerns a company involved in the activity of
transport between Member States and covers the Common
Market and as it may distort or
threaten to distort
competition inside this market.

(82) The State guarantee therefore falls to be considered a State
aid within the meaning of Article 87(1) of the EC Treaty.
Moreover,
this conclusion is accepted by the Cypriot
authorities as in relation to the guarantee they have sought
to fulfil the conditions established in the R & R guidelines.

the procedure,

its own restructuring costs,

(83) While the initial plan provided that the Cypriot authorities
would guarantee the CYP 55 million loan in full, in the
course of
in order to limit aid to the
minimum and to ensure a sufficient contribution of the
the
company to cover
authorities decided to reduce the part of the restructuring
loan covered by the guarantee to a maximum of CYP
45 million. In addition, the Cypriot authorities specified
that the guaranteed and the non guaranteed part of the loan
will be independent and in particular that there will be no
subordination of the latter to the former. This means that at
least CYP 10 million of the CYP 55 million commercial
loan will be obtained by the airline without any guarantee
or other State intervention.

Sale of Eurocypria

(84) The Cypriot authorities have indicated that the sale of
Eurocypria has been completed in August 2006 and that
the company has been sold to the State for CYP
13,425 million. The Commission must therefore examine
how this price has been arrived at to verify its validity and
to determine if there was any State aid involved in the
transaction. Paragraph 59 and following of the decision to
open the investigative procedure recalls that this might be
the case,
if the price paid is too high in
comparison to the market price of the company.

in particular,

(85)

the expert valuations

In this regard, the Commission notes that this figure has
been arrived at following two expert assessments carried
out on behalf of both vendor and purchaser. Having carried
out a detailed analysis of
the
Commission can conclude this price corresponds to fair
market price; it also notes that the final sales price is, in any
event,
lower than the CYP 15 million foreseen in the
restructuring plan and in the opening of the investigative
procedure. The Commission therefore concludes
that
Eurocypria's sale does not amount to State aid to Cyprus
Airways because the company has not been sold at more
than its true value.

(86) The Commission also notes the Cypriot authorities' stated
intention that
that Eurocypria will be operated as a
completely independent company outside of the Cyprus
Airways group; the Commission considers that as Euro-
cypria remains government owned the risk arises that it
may not be operated truly independently of its former
mother company. Accordingly and to address
these
concerns the Commission intends to impose conditions
on Cyprus to ensure that the two companies are and
remain separate for a sufficient period of time and that they
conduct any business between them at arm's length.

Capital Increase

(87) A further aspect of the restructuring plan is that in mid
2007 some 18 months after the start of restructuring the
capital of Cyprus Airways will be increased by some CYP
14 million. It is the intention of the Cypriot authorities that
this capital increase will take place in proportion to the
current shareholding and that the public/private ownership
ration will be maintained. This will mean that the State will
contribute CYP 9,8 million (EUR 17 million or 70 %) while
the other
add CYP 4,2 million
(EUR 7,3 million or 30 %).

shareholders' will

(88) The Commission has therefore to determine if

in this
situation the public part of this proposed capital increase
constitutes State aid. In doing so it bases its judgement on
the ‘market economy investor principle’ an approach which
has been confirmed by the jurisprudence of the Court (5).
According to the case law of the Court, to examine whether
a public capital
is
appropriate to take account of the real possibilities that
the beneficiary company has to obtain equivalent financial
resources in resorting to the normal capital markets. There
is no State aid when new public capital is contributed under
conditions which would be acceptable for a private investor
operating under normal conditions of the market economy.

injection constitutes State aid,

it

(89) The behaviour of the public investor has therefore to be
compared with the supposed behaviour of a private
investor, such as a private holding or of a private group
of companies pursuing a structural, overall or sectoral
policy, and guided by prospects of
long-term profit-
ability (6). Accordingly,
the Commission considers that
capital contributions from public funds are not State aid
when private shareholders take part in the operation firstly
at least proportionally to the number of their actions,
secondly under conditions identical to those of the public
investor and finally if the proportion of shares subscribed
to by the private investors has a real economic significance;
the Commission considers that parity for the participation
of public and private investors is guaranteed when a

(5) See the judgement of the Court of 16 May 2002 in Case C482/99
2002 ECR I-4397 as well as the conclusions of Advocate general
Geelhoed of 27 September 2001, in Joint cases C-328/99 &t C-399/
00, Italy v Commission & SIM 2 Multimedia SpA v Commission.
Judgement of 21 March 1991,
(C-305/89) 1991 ECR I-1603 point 20.

Italy v Commission ‘Alfa Romeo’

(6)

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(90)

(91)

commercial bank or investor has agreed to guarantee in
advance and at market conditions the participation of the
private investors in the capital
the same
conditions as those offered to the public investor. This
approach, based on the concomitance of contributions, has
been regularly upheld by the Court of First instance and the
ECJ (7).

increase, at

to the
It

In the present case, a commercial investment bank, Cisco
has agreed at market conditions to underwrite the private
investors
the proposed
recapitalisation.
also specified by the Cypriot
authorities that all shareholders will purchase the shares
at the same value, to be determined jointly by Cyprus
Airways and Cisco, and under the same market conditions
as the private investors.

extent of 30 % of
is

In this connection, the Commission has received a copy of
the letter of intent dated 14 December 2006 sent to Cyprus
Airways by Cisco where the bank accepts to conclude a
contract to underwrite or have underwritten the success of
the recapitalisation operation. In addition, before commit-
ting itself in respect of the investment vis-à-vis private
investors, Cisco has carried out a detailed study of the
restructuring plan and of
the operation. Furthermore,
before concluding the final contract, as is usual market
practice, it will carry out (or have carried out on its behalf) a
due diligence operation which any investor should carry out
In this way the bank
before initiating the operation.
surrounds itself with all
the guarantees and securities
enabling it to adjust its offer to the risks taken. It should be
noted that this bank is not controlled, directly or indirectly,
by the Member State concerned. The final guarantee
contract with Cisco will be concluded close to the
beginning of the offer period and will contain the standard
provisions and undertakings in force in this type of contract
and in accordance with best national and international
practices.

(92) The conditions to which the conclusion of

the final
guarantee contract are subject may be grouped together in
two blocks; the first concerns relatively standard elements
with no direct influence on the Commission's assessment
but only on its actual implementation. They include:

a)

b)

c)

the absence of extraordinary events which could be
detrimental
the
operation,

to the successful completion of

the transmission to the bank of complete information
on the economic and financial situation and on the
management of Cyprus Airways,

the involvement of
procedures for the operation,

the bank in determining the

(93) On the other hand, the second block of conditions set out
the
they

in the bank's letter of
assessment of
should be analysed in detail, these mainly concern:

intent are liable to affect
the operation by the Commission;

(7)

Judgement of the CFI of 12 December 2000 in Case T-296/97,
Alitalia v Commission, 2000, ECR II-3871, point 81.

a)

b)

c)

the difference in the share issue price relative to the
stock market quotation,

the fees/commissions to be charged by the bank for
the operation,

the agreement by both the bank and the State (Cyprus
Airways ‘s principal shareholder) that they will both
participate in the capital increase.

(94) So far as concerns the subscription price for the new shares,
Cisco and Cyprus Airways have agreed that the price or
price range for the issue of the new shares will be defined
jointly in accordance with market practices in the light of
the stock market conditions prevailing at the time of the
launch of the operation. Cyprus has confirmed to the
Commission that a single price will be charged for all the
subscribers involved and that no specific discount will be
granted to the guarantor.

(95) So far as concerns, secondly, the remuneration of the banks
through commissions, the latter are based on the value of the
proportion of the operation (30 %) to be subscribed by the
market. The Cypriot authorities have indicated that the fee
to be paid to Cisco is in accordance with market principles
on the main European stock markets so as to guarantee the
successful completion of a comparable share placement
operation. The Commission can conclude therefore that the
transaction between Cyprus Airways and Cisco is in
accordance with market conditions
type of
operation and that it does not amount to a discount on
the price paid by the bank for the shares that it may be
called upon to subscribe. Consequently, the fee paid to the
bank does not have the effect of enabling it to participate in
the operation on more favourable conditions than the State
or the other shareholders.

this

for

(96) So far as concerns, thirdly, the requirement by both State and
bank that
the
the other participate in the capital
Commission would point out that the requirement of both
parties that the other participate in the exercise is an
essential decisive element to guaranteeing the success of the
capital increase.

increase,

(97) The Commission notes the undertaking given by the
Cypriot authorities to transmit the final contracts with the
bank containing these formal and unconditional subscrip-
tion obligations to the Commission immediately after
conclusion and before subscription of
the new capital
increase by the public authorities. A second undertaking
given by the Cypriot authorities is to submit a report
containing the actual subscription levels for this capital
increase once the operation has been carried out. In this
connection, the Commission considers that it goes without
saying that there cannot be collateral or implicit agreement
whereby the State would exonerate the bank from their
obligation if the recapitalisation offer was insufficiently
subscribed. The Commission will pay the utmost attention

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to strict compliance with these undertakings so as to
ascertain that the terms of the present decision will be
properly adhered to.

(98) This operation enables the private market to subscribe to a
significant extent (30 %) in respect of the shares newly
issued under the same conditions as the public shareholders
given that the share prices will be identical and the rights
attaching to each share will be the same for all shareholders.

(99)

the capital

In summation, in view of this analysis and of the constant
practice of the Commission and the case law of the Court
as regards the qualification of State participation in capital
increases together with private investors, looked at on its
own merits and independent of the other restructuring
increase planned for mid-2007
measures,
amounts to a concomitant participation of public and
private shareholders and therefore the participation of the
State would not amount to State aid if the conditions set
out above, relating to the fact that the capital increase will
be underwritten by a commercial investment bank in a way
ensuring effective concomitance of public and private
subscription and to the ratio of public to private ownership,
are complied with.

(100) Nevertheless, the Commission notes that the jurisprudence
of the European Courts indicates that ‘the mere fact that a
public undertaking has already made capital
injections into a
subsidiary which are classed as aid does not automatically mean
that a further capital injection cannot be classed as an investment
which satisfies the private market economy investor
test.…
Nevertheless, it is the Court's view that in a case such as this,
which concerns three capital injections made by the same investor
over a period of two years the first two of which brought no
return,
the third
injection could reasonably be severed from the first two and
classed,
the private investor test, as an
independent investment.

the Commission must determine whether

for the purposes of

increase actually happen on
participation in the capital
similar terms since at any rate, the Commission considers
that, as is clear from the following analysis, even if the State
participation in the capital increase were to be considered
as State aid that this aid would be considered as compatible
with the common market.

Legal basis for appraisal

(102) Having concluded that

the long term loan of CYP
55 million guaranteed by the state to finance part of the
restructuring of Cyprus Airways constitutes State aid and
that the State participation in the capital increase could
contain elements of State aid,
the Commission must
examine its compatibility with the common market.

(103) It is therefore necessary to examine the compatibility of the
aid in the light of Articles 87 (2) and (3) of the EC Treaty
which provided for exemptions to the general rule of
incompatibility set out in Article 87(1).

(104) The exemptions in Article 87(2) of the EC Treaty do not
apply in the present case because the aid measure does not
have a social character in that it is not granted to individual
consumers, nor do they make good the damage caused by
natural disasters or exceptional occurrences nor are they
granted to the economy of certain areas of the Federal
Republic of Germany affected by its division.

(105) The exemptions in Articles 87(3)(a), 87(3)(b) and 87(3)(d)
do not apply in this case because the aid does not promote
the economic development of areas where the standard of
living is abnormally low or where there is
serious
unemployment, it does not promote the execution of an
important project of common European interest or remedy
a serious disturbance in the economy of a Member State
nor does not promote culture and heritage conservation.

The Court considers the following considerations to be relevant in
the capital
making such a determination:
injections in question, their purpose, and the subsidiary's situation
at
the time when each decision to make an injection was
made’ (8).

the chronology of

(106) Therefore only the exemption provided for

in Arti-
cle 87(3)(c) may apply. Article 87(3)(c) provides that state
aid can be authorised where it is granted to promote the
development of certain economic sectors and where this
aid does not adversely affect trading conditions to an extent
not contrary to the common interest.

(101) In the present case, the Commission notes that while the
State and the private shareholders will subscribe to the
capital increase at the same price and all the new shares will
have the same rights, the fact is that the State acts, at the
same time, as the guarantor of a significant loan to the
beneficiary and that
this will extend far beyond the
moment of the capital increase, and purchases a subsidiary
it is not
of the company being restructured. However,
necessary to assess with precision whether, given the
cumulation of the capital increase with these two measures,
the State participation and the private shareholders’

(8) Case T11/95 BP Chemicals Ltd v. Commission [1998] ECR II-3235

paragraphs 170 & 171.

(107) In this respect, the applicable community framework for
deciding on compatibility are the R & R guidelines of 2004
as well as the previously mentioned 1994 guidelines.

Compatibility of the intended measures with the
common market

(108) The Commission has therefore to assess whether

the
restructuring plan complies with the provisions of the
applicable guidelines. The basic principle (point 31 of the R
& R guidelines) of which is to ‘allow the grant of restructuring

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aid only in circumstances in which it can be demonstrated that it
does not run counter to the Community interest. This will only be
possible if strict criteria are met, and if it is certain that any
distortions of competition will be offset by the benefits flowing
from the firm's
there are
survival…and that,
adequate compensatory measures in favour of competitors.’

in principle,

(109) The guidelines then set out a number of conditions under

which restructuring aid can be granted.

that the company would be able to secure any source of
commercial finance.

(115) In its decision of 3 May 2005 on ‘Cyprus Airways (Rescue
aid)’
the Commission concluded therefore that Cyprus
Airways is well and truly a company in difficulty within the
meaning of
the R & R guidelines. This was also the
conclusion reached by the Commission in opening the
for
procedure. Cyprus Airways
restructuring under the terms of the R & R guidelines.

therefore

eligible

is

Eligibility of the firm

Restoration of long-term viability

(110) First, the Commission must determine if Cyprus Airways is
eligible for restructuring under the terms of the R & R
guidelines. Point 9 of the guidelines states that there is not
a Community definition of a company in difficulty, and add
that ‘the Commission regards a firm as being in difficulty when it
is unable, whether through its own resources or with the funds it
is able to obtain from its owners/shareholders or creditors, to stem
the public
losses which without outside
authorities, will almost certainly condemn it to going out of
business in the short or medium term’.

intervention by

(111) Subsequently the guidelines (point 10) clarify that ‘a firm is,
in principle and irrespective of
its size, regarded as being in
difficulty for the purposes of these Guidelines in the following
circumstances (a) in the case of a limited liability company where
more than half of its registered capital has disappeared and more
than one quarter of that capital has been lost over the preceding
12 months’.

(112) In point 11 it is also stated that ‘Even when none of the
circumstances set out in Point 10 are present a firm may still be
considered to be in difficulty in particular where the usual signs
of a firm in difficulty are present, such as increasing losses,
diminishing turnover, growing stock inventories, excess capacity,
declining cash flow, mounting debt, rising interest charges and
falling or nil net asset value’.

(113) The Commission has noted in the opening of procedure
that Cyprus Airways is a company with limited liability
which has already lost a significant part of its authorised
capital. At 31 December 2003, Cyprus Airways had an
authorised capital of CYP 55,5 million (EUR 95 million)
but by 31 December 2004 it had lost CYP 26,2
(EUR 44,8 million), close to 50 % of its share capital, in
the previous 12 months.

(116) The second condition (as set out in point 35 of the R & R
guidelines) to be complied with is that the “restructuring
plan, the duration of which must be as short as possible, must
restore the long-term viability of the firm within a reasonable
timescale and on the basis of realistic assumptions as to future
operating conditions.

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

(118) Thus far in the restructuring the company has reduced its
costs by CYP 19,5 million and has shed more staff than
were foreseen by the restructuring plan. The plan foresaw a
reduction of 385 staff (out of 1800) and eventually 414
persons availed of the possibility to leave the company.
This significant downsizing in the cost base together with
the negotiated decreases in salary for remaining staff as well
as increases in productivity and work practices will provide
major savings and should give the company the necessary
flexibility and the adaptability going forward to achieve its
objectives.

(119) The Commission considers that Cyprus Airways should be
capable of making a success of its restructuring within the
prescribed time limit. Indeed, although only 18 months has
elapsed since the grant of rescue aid (May 2005) the results
for the company are already slightly better than anticipated.
For further improvement attention should be paid to
employees' opinions on how to manage the necessary
restructuring. In cases of this type the management of the
restructuring is very important and the third party
comment received shows that this may be especially so
in this case.

(114) The Commission noted that losses of the Group (mainly
caused by Cyprus Airways) went from CYP 20,9 million in
2003 to CYP 39,4 million by the end of 2004. The
shareholder equity of Cyprus Airways had therefore
declined from CYP 55,6 million (EUR 95 million)
in
2003 to CYP 14,4 million (EUR 25 million) in 2004. It is
therefore highly unlikely given its parlous financial state

(120) In relation to the long-term loan of CYP 55 million
(EUR 96 million) partially guaranteed by the State, the
Cypriot authorities have demonstrated that this sum will be
the sale of
used (along with the sales proceeds for
to repay the rescue aid to restructure the
Eurocypria)

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airline over the coming years. The capital increase of CYP
14 million planned for mid-2007 will be used to reduce
the outstanding amount of the loan. The restructuring plan
is closely linked with a cost cutting plan so as to maximise
revenue. Over time it is intended to grow the revenue of
the company and to thereby repay the remaining amount
of the loan to the bank from revenue.

(126) It is further specified (point 39) that ‘These measures may
comprise divestment of assets, reductions in capacity or market
presence and reduction of entry barriers on the markets concerned.
When assessing whether
compensatory measures are
the
appropriate the Commission will take account of the market
structure and the conditions of competition to ensure that any
such measure does not lead to a deterioration in the structure of
the market’…

(121) The Commission must also evaluate if the assumptions on
which the restructuring has been based are reasonable in
the circumstances and if
the predictions and forecasts
correspond with what is required in the guidelines. The R &
R guidelines provide (point 35) that ‘The plan must be
submitted in all relevant detail to the Commission and include, in
particular, a market survey. The improvement in viability must
derive mainly
contained in the
restructuring plan; it may be based on external factors such as
variations in prices and demand over which the company has no
great influence, but only if the market assumptions made are
generally acknowledged.’

from internal measures

(127) The Commission must therefore examine the restructuring
and determine if sufficient measures have been taken in
relation to Cyprus Airways and the Cyprus Airways group
so as to minimise the distortive effect of the aid.

(128) At the end of 2004 the company initiated what was called
an ‘action plan’and began by reducing its fleet by two
aircraft one of which was subsequently wet-leased to
Eurocypria and gave up a number of routes previously
served by it being Warsaw, Budapest and Colombo.

(122) In this respect it can be verified that this part of the
restructuring plan has developed as predicted.
In the
present case, with regard to the traffic flows and
development of the market the Commission refers to the
in relation the
studies carried out
two independent
valuation of Eurocypria in as much as these relate the
development of the Cypriot aviation market.

(123) According to the restructuring plan Cyprus air traffic is
assumed to increase by 3,5 % on average per annum over
the years 2005-2010, while Cyprus Airways
traffic
projections will grow at a rate of 2,4 % on average per
annum over the years 2005-2010. In the report prepared
by PwC the overall growth for Cyprus air traffic is forecast
by IATA (the International Air Transport Association) at
4,3 % over the 2006- 2008 period, this suggests that the
assumptions taken into consideration in the plan were
reasonable. Therefore, the forecasts of the restructuring
plan in terms of Cyprus Airways' results appear plausible,
having regard to the other rationalisations carried out by
the company.

(124) In the light of the above-mentioned factors, the Commis-
sion considers that Cyprus Airways will be able to find its
financial viability within a reasonable time, as foreseen by
the business plan.

Compensatory measures

C y p r u s A i r w a y s

the time of

the 2006 summer

(129) In this framework, the fleet of the airline was reduced by
one aircraft at
the
the end of 2004; at
implementation of the restructuring plan Cyprus Airways
operated 10 aircraft (2 A319, 6 A320-200 and 2 A330-
200) and wet-leased out a further A320-200 to Eurocypria,
this wet lease arrangement was brought to an end at the
end of
the
Commission notes that air traffic growth prospects range
from 3,5 to 4,3 % per annum on average over the years
2005-2010, while Cyprus airways projections foresee a
growth of 2,4 % per annum, which will lead to a market
share decrease from 26,6 % to at most 23,2 % over the
period. The Commission can accept
that any further
reduction in the size of the fleet or market share would risk
jeopardising the possibilities of
the airline to recover
without providing any meaningful market opportunities
for competitors.

In addition,

season.

(130) In the opening of procedure the Commission specifically
interested third parties in this

invited observations of
regard; no comments on this issue were received.

(131) In addition, the Commission underlines that the R & R
Guidelines (point 55) provide that as ‘Economic and social
cohesion (are) a priority objective of the Community…the
Commission must take the needs of regional development
into account when assessing restructuring aid in assisted
areas’. It is further provided (point 56) that in ‘assisted areas
… the conditions for authorising aid may be less stringent
as regards the implementation of compensatory measures
and the size of the beneficiary's contribution’.

(125) The R & R guidelines also provide (point 38 thereof) that ‘In
order to ensure that the adverse effects on trading conditions are
minimized as much as possible, so that the positive effects pursued
outweigh the adverse ones, compensatory measures must be taken.
Otherwise, the aid will be regarded as‘ contrary to the common
interest’ and therefore incompatible with the common market.’

(132) In this context it should be recalled that for the period
between 1 May 2004 and 31 December 2006 (9) the whole
of Cyprus was eligible under the derogation of Arti-
cle 87(3)(c) of the EC Treaty. For the period 2007-2013

(9) State aid CY 14/2003 — Cyprus — Regional aid map 2004-2006

(C(2004) 1757/1 of 28.4.2004).

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22.2.2008

the Cypriot
two regions covering together 50 % of
population should be eligible to receive regional invest-
ment aid under the derogation of Article 87(3)(c) of the EC
Treaty at an aid intensity of 15 %. Furthermore, Cyprus
exhibits a number of territorial, and, therefore permanent,
characteristics which impact on its socio-economic devel-
opment. Cyprus's southern peripherality results in direct
problems with respect to accessibility to the rest of the
European Union and as a result the country is extensively
dependent on air and sea transport, but particularly on air
transport. This is important as in the case of Cyprus, air
travel
is the only viable means of business passenger
transport. Eurostat statistics for 2003 which calculate the
so called ‘air dependency’ of an economy demonstrate that
Cyprus is the most highly dependent Member State on air
travel (10).

restructuring resources is made up of a loan which will
have to be reimbursed by the company out of its own
results and therefore does not constitute permanent
funding whereas the company has to face definitive
restructuring costs.

(136) Additionally, the Commission notes that the commitment
of the Cypriot authorities to reduce the part of the CYP
55 million loan that will be covered by the government
guarantee amounts to a further limitation to the State aid
element in comparison to what was initially foreseen.

Level of own contribution

C o n c l u s i o n

(133) In this regard and having regard to the particularities of the
air transport market in Cyprus and on the basis that
Cyprus Airways has already reduced its fleet and that the
former subsidiary Eurocypria will now operate as a legally
and financially independent business outside of
the
ownership and control of Cyprus Airways the Commission
can conclude that sufficient compensatory measures have
been proposed by the Cypriot authorities to address the
market distortions
that will be occasioned by the
restructuring.

Aid must be reduced to the minimum

(134) The R & R guidelines (Point 43) of the guidelines provide
that the ‘amount and intensity of the aid must be limited to the
strict minimum of the restructuring costs necessary to enable
the existing
restructuring to be undertaken in the light of
financial
the
the company,
business group to which it belongs. Such assessment will take
account of any rescue aid granted beforehand’. The Commission
considers that this condition is fulfilled.

its shareholders or

resources of

(135) Indeed, on the one hand, as recalled above, the restructur-
ing costs amount to CYP 71,1 million. On the other hand,
the revenues used to finance this restructuring include the
CYP 55 million loan (partially guaranteed by the State),
CYP 13,425 million of sales proceed of Eurocypria, plus
around CYP 8,5 million of other resources, coming in
particular from the divestment of various assets. The
proceeds of the planned capital
increase should not be
added to these measures, as it will be used in full to
the CYP 55 million loan, and will
reimburse part of
therefore not increase the total amount of the resources
utilised for the restructuring, but only substitute for an
equivalent part thereof. The resources therefore amount in
total to around CYP 76,9 million. The Commission finds
this amount acceptable, and concludes that there is no
excess of permanent resources in comparison to the
the
corresponding costs,

the major part of

since

(10) Cyprus has an air passenger per head of population ratio of 8,50, by

way of comparison the EU 25 ratio is 1,30.

(137) In relation to the level of own contribution the guidelines
(point. 43) provide that ‘Aid beneficiaries will be expected to
make a significant contribution to the restructuring plan from
their own resources,
including the sale of assets that are not
essential to the firm's survival, or from external financing at
market conditions. Such contribution is a sign that the markets
return to viability. Such
believe
future
contribution must be real,
expected profits such as cash flow, and must be as high as
possible.’ The guidelines then indicate what level of own
contribution would normally be considered as appropriate;
for a company the size of Cyprus Airways this rate would
be 50 %.

i.e., actual, excluding all

feasibility of

in the

the

(138) The Commission has established that the restructuring

costs will be approximately CYP 71,1 million.

(139) The amounts which should be considered as own
contribution will consist of: at
least CYP 4,2 million
corresponding to the part of the CYP 14 million capital
increase that will be underwritten by the private investors;
at least CYP 10 million of the CYP 55 million commercial
loan that will be borrowed by the airline on the markets
without guarantee or other State intervention; as well as the
CYP 8,5 million (as set out in paragraph 53 above) of sales
proceeds of various assets.

(140) The Cyprus authorities also argue that the sale proceeds
from the sale of Eurocypria should also be considered as
own contribution. The practice of the Commission in this
regard (11) is that if such a sale takes place at the real value
of the assets (independently of the nature of the buyer) it
does not constitute State aid to the enterprise selling the
assets. The sales proceeds of these assets may then be used
to finance the restructuring and should be regarded as
making up an own contribution. This means that the sales
proceeds from the sale of Eurocypria of CYP 13,425 million
must also be considered as own contribution. This
conclusion is further reinforced in the present case by
the commitment from the Cypriot authorities and the
condition imposed by the Commission that Eurocypria will
be effectively run as a separate entity from and a real
competing airline with Cyprus Airways.

(11) Commission Decision 2005/406/EC of 15 October 2003 concern-
ing RTP — (OJ L 142 of 6.6.2005, p. 1 and Commission decision
2005/418/EC of 7 July 2004 concerning Alstom OJ L 150 of
10.6.2005, p. 24) (in particular points 125 and 215).

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L 49/39

(141) This results in a total own contribution of at least CYP
36,2 million. This amounts to 51 % of the restructuring
costs. The Commission can therefore conclude that the
requirement
to the
restructuring costs has been met in the present case.

to contribute a sufficient amount

(142) The Commission further stresses that the restructuring
costs are in majority covered by a loan of CYP 55 million,
which, even if its has been partly guaranteed by the State,
will have to be reimbursed by the company out of its own
results, and not by a CYP 55 million State grant (12). The
effort that the company will have to produce in order to
cover, over time, the costs of its own restructuring has the
same effect as own financing of its restructuring, the only
difference being that this effort can be spread over several
years thanks to the commercial loan guaranteed by the
State

In the light of the foregoing considerations, the Commission,

HAS ADOPTED THIS DECISION:

Article 1

The restructuring aid granted by Cyprus to Cyprus Airways
Public Ltd is deemed to be compatible with the common market
pursuant to Article 87(3)(c) of the EC Treaty provided that the
conditions laid down in articles 2 to 5 are complied with.

Article 2

Cyprus shall, by 31 December 2007, submit a report to the
Commission on the progress of and the management of the
restructuring plan.

Article 3

1. Cyprus shall ensure that Cyprus Airways Public Ltd and
Eurocypria are and continue to be operated as fully competing
companies. Cyprus Airways Public Ltd and Eurocypria shall be
run as separate legal entities. Neither Cyprus Airways Public Ltd
nor Eurocypria shall be allowed to acquire any shareholding in
the other and no equivalent capital operation, such as a merger,
shall be carried out between both companies. All transactions
between Cyprus Airways Public Ltd and Eurocypria shall be
conducted at arm's length.

2.

Paragraph 1 shall apply until either:

a)

the loan guarantee granted by Cyprus to Cyprus Airways
Public Ltd is brought to an end; or

b)

Cyprus no longer has direct or indirect majority participa-
tion and/or control in the capital of both companies.

Article 4

Cyprus shall ensure that the capital increase to the extent of CYP
14 million (EUR 24,3 million) in Cyprus Airways Public Ltd
foreseen for mid-2007 respects the following conditions:

a)

b)

c)

d)

increase will not take place until a formal
the capital
unconditional commitment to underwrite the successful
outcome of the operation has been signed by the appointed
underwriting commercial bank with the exception of the
usual conditions concerning cases of force majeure, acts of
war, terrorism and other similar cases;

the State can only subscribe in the capital increase up to a
maximum of 70 % thereof,

the State subscribes the new shares issued on the basis of
the same rights and under the same conditions, at the same
price as the private investors, without prejudice to the
proposed timetable for the underwriting by the bank of the
successful completion;

the operation must not be accompanied by any collateral
agreement or implicit agreement whereby the State would
exonerate the bank from its obligation if the recapitalisation
offer was insufficiently subscribed or grant the bank any
special discount on the issue price.

Article 5

Cyprus shall provide the Commission with any reports and
documents concerning both the participation of the State and of
the bank and the private shareholders of Cyprus Airways Public
Ltd and particularly the final contracts with the bank and the
reports justifying the fees and eventual share price in the context
of the capital increase.

Article 6

This Decision is addressed to Cyprus.

Done at Brussels, 7 March 2007.

For the Commission

Jacques BARROT

Vice-President of the Commission

(12) In this regard see Commission decision (2005/346/EC) of 14 July
2004 concerning MobilCom (OJ L 116 of 4.5.2005) (in particular
point 173).