Estonian Air, a small state-controlled airline with a handful of planes, has ceased operations after European Union regulators ordered Estonia to recover €85 million in state aid granted to it.

On Saturday the European Commission ruled following a near-three year investigation that the aid extended to the loss-making national carrier had given it an unfair advantage.

"Estonian Air therefore needs to pay back the state aid already received, which according to the Commission's information amounts to about €85 million plus interest, and cannot receive an additional €40 million of restructuring aid," the EU executive said.

Estonian Economy Minister Kristen Michal told a news conference the airline did not have the ability to pay, Estonian daily Postimees reported.

Estonian Air said on its website that passengers flying between Nov. 8 and Nov. 11 would be given replacement flights while others would have their tickets refunded.

The Commission said it was unfair to taxpayers to prop up Estonian Air artificially as the carrier had not implemented the necessary overhaul to ensure its viability despite receiving public subsidies over the past five years.

In anticipation of a negative EU ruling, the Estonian government has set up a new company, Nordic Aviation Group, to offer flights from the capital Tallinn in cooperation with five airlines. It started flights on Nov 8., the new company said in a press release.