An in-depth investigation to assess whether a €130 million restructuring aid for Air Malta is in line with EU state aid rules has been opened by the European Commission.

The Commission said that it doubts whether the notified restructuring plan complies with the requirements of the 2004 EU Rescue and Restructuring. It also has to establish whether the airline is eligible for restructuring aid in view of a capital injection carried out by Malta in 2004.

It said it 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.

In its investigation, the Commission will examine 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.

In November 2010, the Commission authorised a loan facility of €52 million for Air Malta as rescue aid. The Maltese authorities committed themselves to notify a restructuring plan within six months after the rescue aid decision.

Last May, Malta notified the Commissionof a €130 million capital increase to help restructure the company, which has experienced financial difficulties for several years. The underlying restructuring plan covers a five year restructuring period from 2011 to 2016.

THE GOVERNEMNT'S REACTION

The government in a reaction said the European Commission had taken the Air Malta restructuring programme forward when it launched its formal investigation.

"This step has been welcomed by Tonio Fenech, Minister of Finance, the Economy and Investment. The formal investigation stage is a normal part of the Commission's approval process for Restructuring Plans when State aid is employed in the restructuring of airlines. All recent airline restructuring plans have gone through the same process (Cyprus Airways in 2006, Alitalia in 2008, Austrian Airlines in 2009, Malev – Hungarian Airlines – in 2010 and Czech Airlines in 2011)," the government said.

"The Ministry of Finance, the Economy and Investment is pleased that this important stage has been reached. It means that the approval process of Air Malta's Restructuring Plan by the Commission is on schedule.

"The formal investigation is essentially a legal procedure which entails the publishing, in the European Union Official Journal, of the details of Air Malta's Restructuring Plan and the request of the Maltese Government to provide the airline with Rescue and Restructuring aid. This procedure ensures that all interested parties are provided with the opportunity to voice their opinion on the planned restructuring, in line with European competition law.

"In this phase of the process the European Commission is expected to describe the background of the Air Malta case, the aims of the Restructuring Plan including the main revenue and cost initiatives, as well as the importance of Air Malta to the Maltese population and to the country's economic well-being. Moreover, the Commission will identify those areas of the Restructuring Plan that it feels raise EU competition issues, asking any interested parties to submit their views also on these elements. Any party can act as an interested party, submitting their legal arguments on the case accordingly.

"The restructuring of Air Malta commenced in November 2010, and with increasing pace, the airline has now put in place the foundations for its recovery. Key restructuring milestones since November 2010 have included the:

· Appointment of a new management team with specific airline turnaround experience;

· Preparation and lodgement of a Restructuring Plan with the European Commission;

· Negotiated sale of the Group's property assets;

· Agreed financing plan with the principal shareholder and banks;

· Agreements with Unions to changes in work practices that are necessary to support a headcount reduction plan of approximately 500 staff;

· Closure and planned disposal of non-core loss making operations; and· Identification, management and commencement of a holistic business change agenda incorporating more than 160 internal projects that span various areas related to cargo, finance, corporate and financial restructuring, contracts management, ground handling, human resources, information technology and revenue enhancement."

The government said the airline is also moving ahead with the voluntary redundancy schemes while filling key vacant posts in the new organisational structure. Critically, Air Malta would also 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."

The government said the Ministry of Finance, the Economy and Investment, together with 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.

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