Updated | Fenech welcomes first step towards EC 'approval' of Air Malta restructuring

Updated at 1pm with Finance Ministry statement.

The European Commission has opened an in-depth investigation to assess whether a €130 million restructuring aid for the Maltese state-owned airline Air Malta is in line with EU state aid rules.

The Commission said it has doubts whether the notified restructuring plan complies with the requirements of the 2004 EU Rescue and Restructuring Guidelines.

"In particular, the Commission is concerned that the forecasts on long-term viability may not be realistic enough and that the proposed capacity reduction may not be appropriate to compensate for the distortions of competition created by the state support. The Commission also has doubts whether Air Malta's own contribution to the restructuring cost is sufficient," the EC said in a statement.

The Commission said it will need more information to determine whether Air Malta is eligible for restructuring aid in view of a capital injection carried out by Malta in 2004.

Finance Minister Tonio Fenech welcomed the step: "It means that the approval process of Air Malta's Restructuring Plan by the Commission is on schedule."

Fenech said his ministry and the Permanent Representation of Malta to the European Union, and Air Malta are prepared for this formal investigation phase of the European Commission's approval process and are confident that this phase will proceed smoothly.

The Commission will examine in particular whether the planned measures are appropriate to restore the company's long-term viability and whether they ensure sufficient compensation for the distortions of competition triggered by the state support.

"The opening of an in-depth investigation allows interested third parties to comment on the measures under investigation. It does not prejudge the final outcome," the Commission said.

The airline is also moving ahead with voluntary redundancy schemes while filling key vacant posts in the new organisational structure. Critically, Air Malta will embark on a cultural transformation and business re-engineering process to reposition the airline and change it into a modern carrier able to successfully compete in the ever evolving aviation business. Overall the restructuring process is aiming to increase the airline's revenue by €30 million and decrease costs by the same amount; this to allow to return to profitability by 2015.

The first positive results announced on Friday 20 January 2012 with the publication of the airline's interim results up to September 2011.  These are encouraging signs that the situation is improving and positive results have started being registered.

In November 2010, the Commission authorised a loan facility of €52 million for Air Malta as rescue aid, committing the government to a restructuring plan within six months after the rescue aid decision.

In May 2011, Malta notified the Commission of a €130 million recapitalisation to help restructure the loss-making airline for a five-year restructuring period from 2011 to 2016.

The government will also finance the €66.2 million purchase of Air Malta's head office - which it devolved to the airline back in 2004 - from money raised through public loans, Finance Minister Tonio Fenech told MaltaToday this week.

The divestment forms part of several measures the government has devised in a bid to save the loss-making national airline without straying from the European Commission's strict restructuring guidelines. Compensatory measures can take the form of divestiture of assets, a reduction in capacity or market presence or a reduction of entry barriers. Activities that would have been abandoned anyway are not assessed as compensatory measures.

"It's a promise of sale but the restructuring plan still requires approval by the Commission," Fenech said. "The purchase will be funded using public loans among other things but there will not be any austerity measures imposed in order to fund the payment."

The property is expected to be assigned to Malta Enterprise and Malta Industrial Parks.

Over €200 million will be pumped in by the exchequer over the next three years, through the acquisition of more share capital in Air Malta, as part of a mix of measures the government has at its disposal to save the airline.

The European Commission says governments cannot just subsidise their loss-making companies, which is why the jury is still out on green-lighting Malta's 'recapitalisation' of Air Malta.

Over five years, the government will have injected over €200 million which will not be paid back in cash, but by increasing the government's shareholding in Air Malta while the airline sets course for profitable skies.

The EC guidelines on restructuring state that any 'state aid' must include compensatory measures such as divestment of assets, and the reduction in capacity or market presence.

Hints of the Maltese restructuring plan were evident in Budget 2012, even though they were spelt out last week during the presentation of its annual financials.

The €52 million loan forwarded to the airline in 2011 will not be repaid in cash but converted into equity in 2013, increasing the government's shareholding in Air Malta.

Air Malta is expected to pay back €6.2 million in interest for the loan, although the same amount is listed as an 'equity acquisition' in the Budget's revised estimates for 2011.

Another €20.1 million announced in the last budget, also appears under government's list of equity acquisitions for 2012.

And a total of €78.5 million in equity acquisitions will take place in 2013 and 2014.

Together with the €66.2 million purchase for Air Malta's head office, well over €200 million in funds will be committed by the exchequer.

Additional reporting by Bianca Caruana.