Edgars RINKĒVIČS Ārlietu Ministrs K.Valdemāra Iela 3, Rīga LV-1395

EUROPEAN COMMISSION

Brussels, 3.7.2020 C(2020) 4665 final

In the published version of this decision, PUBLIC VERSION some information has been omitted, pursuant to articles 30 and 31 of Council This document is made available for Regulation (EU) 2015/1589 of 13 July information purposes only. 2015 laying down detailed rules for the

application of Article 108 of the Treaty on the Functioning of the European Union, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus […]

Subject: State Aid SA.56943 (2020/N) – Latvia COVID-19: Recapitalisation of airBaltic

Excellency,

1. PROCEDURE

(1) On 7 May 2020, the Republic of Latvia (“Latvia”) pre-notified to the Commission a recapitalisation (“the Measure”) in favour of airBaltic, a Latvian airline company that is not publicly listed1.

(2) By electronic notification of 17 June 20202, Latvia notified the Measure to the Commission as a State aid compatible with the internal market under Article 107(3)(b) of the Treaty on the Functioning of the European Union (“TFEU”) in

1 Latvia submitted a draft notification form on 15 May 2020. Following informal exchanges with the Commission, Latvia submitted additional information on 20, 26 and 27 May, and 2, 3, 9 and 16 June 2020.

2 Following the notification, the Commission transmitted to Latvia requests for information on 17 and 19 June, to which Latvia answered by letter of 19 June. The Commission sent further request for information on 22, 24, 29 and 30 June 2020. Latvia replied to them on 1 July 2020. The Commission sent another request on 3 July 2020, to which Latvia replied the same day.

Edgars RINKĒVIČS Ārlietu Ministrs K.Valdemāra iela 3, Rīga LV-1395

Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111

light of the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak3 (the “Temporary Framework”).

(3) By letter of 17 June 2020, Latvia exceptionally agreed to waive its rights deriving from Article 342 of the TFEU, in conjunction with Article 3 of Regulation 1/19584, and to have this Decision adopted and notified in English.

2. DESCRIPTION OF THE MEASURE

2.1. Objective and justification of the Measure

(4) The Measure aims at restoring airBaltic’s equity and its access to liquidity in the context of the COVID-19 outbreak that led to severe disturbances of the real economy of Latvia.

(5) According to Latvia, the Measure is justified by the losses of airBaltic resulting from the numerous flight cancellations that followed the COVID-19 outbreak. On 12 March 2020, Latvia decided to suspend international air traffic as of 17 March 2020, and later prolonged the suspension until 9 June 2020. Following that suspension, airBaltic cancelled all flights planned between 17 March and 12 May 2020. airBaltic does not expect to resume meaningful operations before July 20205. In total, air Baltic expects that it will have to cancel [40 000 - 50 000]* flights in 2020.

(6) Latvia explains that those flight cancellations will have a major impact on airBaltic’s results in 2020. Prior to the COVID-19 outbreak, airBaltic budgeted a net profit of EUR [250 000 – 750 000] in 2020. Due to the COVID-19 outbreak, airBaltic now projects a net loss of EUR [200-300] million at the end 20206. Those losses could climb to EUR [200-300] million in the first quarter of 2021.

3 Communication from the Commission - Temporary framework for State aid measures to support the economy in the current COVID-19 outbreak, OJ C 91I, 20.3.2020, p. 1, as amended by Communication from the Commission C(2020) 2215 final of 3 April 2020 on the Amendment of the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, OJ C 112I , 4.4.2020, p. 1, by Communication from the Commission C(2020) 3156 final of 8 May 2020 on the Amendment of the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, OJ C 164, 13.5.2020, p. 3, and by Communication from the Commission C(2020) 4509 final of 29 June 2020 on the Amendment of the Temporary Framework Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, not yet published.

4 Regulation No 1 determining the languages to be used by the European Economic Community, OJ 17, 6.10.1958, p. 385.

5 AirBaltic operated a limited number of flights scheduled in May (approx. 4.6% of flights originally planned) and June (approx. 17.9% of flights originally planned) 2020.

6 AirBaltic’s forecast of the impact of the COVID-19 outbreak on its 2020 results takes into account EUR [200-300] million of cost reductions (reduction on fuel, airport charges, staff employed, depreciation, etc.) and EUR [10-20] million of capital expenditure (“CAPEX”) reductions. It also includes costs deferral such as aircraft lease payments or payments to major suppliers. For the sake of clarity, CAPEX are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment (i.e. any type of expense that a company

(7) Furthermore, airBaltic has adapted its “Destination 2025” business plan setting out its five-year strategy (2020-2025) to take into account the consequences of the COVID-19 outbreak. As a result, on 24 April 2020 airBaltic adopted its new “Destination 2025 CLEAN” business plan (the “Business Plan”). According to its new projections, airBaltic anticipates that the total impact of the COVID-19 outbreak on its net financial results will reach EUR [450-550] million in 20257.

(8) According to Latvia, without external funding, airBaltic will be out of cash by […] and its cash deficit would reach EUR [50-100] million by December 2020. This raises a major issue for airBaltic. airBaltic had issued EUR 200 million worth of 6.75% 5-year Eurobonds in July 2019 (the “2019 Bonds”). The 2019 Bonds contain a minimum liquidity covenant that requires airBaltic to maintain a cash and cash equivalents balance of at least EUR 25 million at all times. Latvia claims that if airBaltic does not receive funding from the State, its cash and cash balance will fall below that threshold, which would lead to an event of default and would give the bondholders the right to request that the 2019 Bonds are immediately and fully repaid8.

(9) Latvia further indicated that the 2019 Bonds also contain a debt incurrence covenant that currently prevents airBaltic from taking a loan to cover its liquidity shortage. As a result, airBaltic is not able to obtain a loan from a bank or from the State itself to cover its liquidity shortage, without breaching that covenant and facing the consequent risk of having to repay the full amount of the 2019 Bonds as of […].

(10) In addition, airBaltic’s losses for 2020 would lead to a decrease of its equity to minus EUR [200-300] million by December 2020, in which case it would face insolvency.

(11) A capital increase is therefore for the Latvian authorities the only solution to avoid that airBaltic exits the market as a result of the COVID-19 crisis.

2.2. The nature and form of the Measure

(12) The Measure takes the form of a capital increase of EUR 250 million.

(13) In its notification of 17 June 2020, Latvia initially planned to inject EUR 286 million. On 29 June 2020, following discussions with the Commission on the proportionality of the Measure, Latvia informed the Commission of its decision to reduce the aid to EUR 250 million, modifying the notification accordingly.

capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure).

*Confidential information

7 According to Latvia, the EUR [450-550] million is the difference in net income between the pre-COVID- 19 business plan and the post-COVID-19 business plan.

8 Latvia indicates that airBaltic’s forecast of the impact of the COVID-19 outbreak on its 2020 results does not take into account the repayment of the 2019 Bonds.

(14) The Measure should be carried out in July 2020 at the latest to ensure that airBaltic covers its liquidity needs.

(15) In any event, Latvia confirmed that the Measure will be carried out before 30 June 2021.

2.3. Legal basis

(16) The legal basis for the Measure is the Governmental Order n° 256 of 8 May 2020 to subscribe to a capital increase of EUR 250 million.

2.4. Granting authority and administration of the Measure

(17) The granting authority is the Government of Latvia. The Ministry of Transport will be the authority administering the Measure.

2.5. Budget

(18) The overall budget allocated to the Measure is of EUR 250 million.

2.6. Beneficiary

(19) The beneficiary of the Measure is airBaltic, the largest Latvian airline with a hub at Riga (RIX) airport. airBaltic submitted to the Latvian authorities a formal written request for a capital injection on 28 April 2020.

(20) AirBaltic is currently owned by the Latvian State (80.05%) and a private shareholder, Aircraft Leasing 1 SIA (“AL1”) (19.95%). The company’s existing share capital amounts to EUR 256 472 824 of registered shares with a nominal value of EUR 1 each.

(21) According to Latvia, airBaltic employs 1 800 people in Latvia and its failure would greatly affect Latvia’s economy. The Latvian authorities provided a study, conducted in early 2019 by the consulting company Roland Berger, showing that airBaltic supports close to 30 000 jobs in the country and contributed to approximately 2.5% (EUR 730 million) of Latvia’s GDP in 2018.

(22) airBaltic was not already in difficulty within the meaning of the General Block Exemption Regulation (“GBER”)9 on 31 December 2019.

2.7. Basic elements of the Measure

2.7.1. Valuation of airBaltic

(23) As airBaltic is not a publicly listed company, Latvia submitted to the Commission a valuation of the company’s market value performed by the independent auditing firm KPMG Baltics AS (the “Valuation Report”).

9 As defined in Article 2(18) of Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.6.2014, p. 1.

(24) The Valuation Report established the market value of airBaltic on 30 April 2020, based on the Business Plan that reflects the impact of the COVID-19 outbreak on airBaltic for the period 2020-2025.

2.7.1.1. Key financial assumptions used by the Valuation Report

(25) Concerning the passenger traffic forecast, the Valuation Report used the projections elaborated in the Business Plan. The latter initially forecasted a scheduled passenger growth multiplied by [0-5] between 2020 and 2025, reaching pre- COVID-19 levels as of 202110.

(26) Following discussions with the Commission, Latvia requested KPMG Baltics AS to revise the Valuation Report to take into account more conservative business projections, concerning in particular the traffic forecast. airBaltic reviewed its traffic forecast downwards to align it further with average standard projections of the sector for 2020-2022. airBaltic expects a slow recovery until 2022 and a stronger growth rate similar to its past performances after 2022. The number of scheduled passengers is now forecasted to increase from 4.96 million in 2019 to [5- 10] million in 2025, with a traffic in 2022 equivalent to the traffic in 2019. The growth of traffic between 2022 and 2025 is similar to the growth of traffic that airBaltic achieved in the years preceding the COVID-19 crisis.

(27) According to Latvia, the increase in passengers will principally concern Riga airport, and to a lesser extent Vilnius and Tallinn airports. The increase will also result from the acquisition/leasing of new aircraft and the transition of the current fleet to a larger and single type of aircraft11. […]12. The Latvian authorities indicated to the Commission that airBaltic is turning its business model from a traditional hub-and-spoke model to a model closer to that of low-cost carriers, to increase aircraft utilisation and to lower costs.

(28) According to Latvia, the traffic forecast is in line with airBaltic’s past performance. In particular, over the past four years, airBaltic has grown at a much higher rate than the industry average and believes that it can replicate that trend after the COVID-19 crisis13. In that regard, Latvia claimed that:

10 In 2019, airBaltic transported 4.96 million scheduled passengers. The Business Plan projected a fall to [0-5] million for 2020, before increasing and reaching 2019 levels by 2021 ([0-5] million passengers in 2020) and continuously increasing to above [5-10] million passenger as of 2024.

11 AirBaltic’s fleet is currently composed of 22 Airbus A220-300, 12 Bombardier Q400 and 4 Boeing 737- 900. airBaltic plans to phase out all its Bombardier and Boeing aircrafts and increase its fleet up to 50 Airbus A220-300, which are larger than the Bombardier, by 2025.

12 According to Latvia, […] is forecasted to allow a […]. For scheduled passengers, it is expected to […] from EUR [70-90] in 2019 to EUR [70-90] in 2025.

13 In particular, the Latvian authorities explained that over the period 2016-2019, the number of passengers flying with airBaltic grew at an average rate of 18% year on year and by 74% in total. Further, over the same period, airBaltic’s revenue per passenger kilometres grew at an average rate of 20% year on year. airBaltic therefore anticipates that, after a downward trend in 2020-2021 due to the COVID-19 crisis, its passenger traffic will resume with growth at an average rate of [15-25]% over the period 2022-2025.

- airBaltic has consistently experienced much stronger growth than the industry average since 2016;

- airBaltic will benefit from its operations within the Baltics, which is a growing and not yet matured market compared to Western European markets. In particular, airBaltic expects that as their purchasing power increases, people living in Baltic countries will increasingly travel by plane.

- airBaltic will transit to an operational model (single type of aircraft) close to low-costs carriers that will enable airBaltic to grow at a similar rate to low-cost carriers and at a faster rate than traditional airlines.

(29) The forecasted revenues are mainly driven by […]. The total revenue growth will be particularly important in […] (when the negative effect of the COVID-19 outbreak is expected to fade away) and will be in range from [10-20]% to [15-25]% annually until 2025.

(30) The Valuation Report also takes as a general assumption that airBaltic’s organic growth rate will be at [0-5]% annually to evaluate the terminal value of the company. The inflation rate is estimated between 0% in 2020 and 1.7% as of 2023 until 2025.

(31) With regard to costs, the Valuation Report takes the assumption that operating costs are based on the actual 2019 results and budgeted costs for 2020, adjusted for inflation or organic growth rate and tied to the relevant cost driver (e.g. increase of fleet).

(32) Finally, the Valuation Report takes into account the projected accumulated losses of airBaltic over the period 2020-2025 that result from the COVID-19 outbreak and its economic consequences.

2.7.1.2. Market value of airBaltic

(33) In order to calculate the value of the company as of 30 April 2020, the independent auditing firm used the method based on discounted future cash flows. The discounted cash flow approach is based on the anticipated future cash flows generated by the business. The projected future cash flows, together with the terminal value of the company, are discounted at the company’s Weighted Average Cost of Capital14 (“WACC”), taking into account the risks associated with the business.

(34) With a WACC calculated at [5-15]%, the aggregate value of the discounted cash flows is estimated to be EUR [20-80] million for the forecast period running from May 2020 to December 2027, while the terminal value of airBaltic is estimated at EUR [300-400] million. As a result, the Valuation Report sets the total Enterprise Value (“EV”) at EUR [300-400] million as at 30 April 2020.

14 The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. Investors often use WACC as an indicator of whether or not an investment is worth pursuing. Put simply, WACC is the minimum acceptable rate of return at which a company yields returns for its investors.

(35) Considering that the net debt position as at 30 April 2020 amounted to EUR [250- 350] million, the Valuation Report established the equity value of airBaltic at EUR [50-100] million.

(36) As airBaltic’s share capital currently consists of 256 472 824 shares, the market value of [each of] those shares is estimated to be EUR [0-1].

(37) The valuation of airBaltic as estimated by KPMG corresponds to an implied EV/EBITDA15 Fiscal Year 2019 multiplier of [0-5]x, which is according to the Valuation Report, in line with the industry’s European peers’ group average.

2.7.2. Pricing of the capital injection

(38) For the purpose of the capital injection, airBaltic will issue a number of new shares that corresponds exactly to EUR 250 million of capital injection. However, because of Latvian commercial law, shares cannot have a price of EUR [0-1].

(39) Under Latvian commercial law, it is not possible to issue shares with a nominal value of EUR [0-1]. Article 230(3) of the Latvian Commercial Law provides that “the nominal value of a share shall be divided by the smallest nominal value of the share of the company and 10 cents without a remainder.”. This means that the nominal value of shares must be a multiple of 10 cents (i.e. EUR 0.10, 0.20 or 0.30 etc.).

(40) Therefore, airBaltic will issue two categories of shares (B and C shares), which will add to shares of category A corresponding to the total number of shares pre-existing the capital injection. Shares of category B will be issued at EUR [0-1] and shares of category C at EUR [0-1]. In order to have an average share price of EUR [0-1], corresponding to the market share price of airBaltic, the latter will therefore issue [700 000 000 – 1 200 000 000] of B category shares (with nominal value of EUR [0-1]) and [100 000 000 – 500 000 000] of C category shares (with nominal value of EUR [0-1])16. airBaltic will therefore issue a total number of [700 000 000 – 1 200 000 000] new shares for an average price of EUR [0-1], in line with the market share price calculated by the Valuation Report.

(41) Each of those new B and C category shares will:

- grant its holder one vote at airBaltic’s shareholders’ meeting;

15 EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The ratio EV/EBITDA is a ratio often used to determine the value of a company.

16 According to Latvia, if airBaltic could issue shares at EUR [0 - 1], it would have had to issue [700 000 000 – 1 200 000 000] shares (rounded to the highest number). In order to get to the value of EUR [0 - 1] per share, the new shares must composed of [0 - 1] B category shares at EUR [0 - 1] and [0 - 1] C category shares at EUR [0 - 1]. This is the result of the division of the B shares ([700 000 000 – 1 200 000 000]) by the total of the shares ([700 000 000 – 1 200 000 000]) that equals [0 - 1] B shares, and the division of the C shares ([100 000 000 - 500 000 000]) by the total of the shares ([700 000 000 – 1 200 000 000]) that equals [0 - 1] C shares. As a result, the value of one share is = [0 - 1]* [0 - 1] + [0 - 1]* [0 - 1] = EUR [0 - 1].

- entitle its holder to equal rights (regardless of the nominal value of the share) to receive a dividend and a liquidation quota as each A category share (i.e. airBaltic’s existing remaining shares prior to the COVID-19 investment);

- give the same priority rights (regardless of the nominal value of the share) as each A category share to acquire newly issued shares in case of a share capital increase and to acquire convertible bonds in case of issue of convertible bonds.

2.7.3. Sale of the State’s equity stake

(42) Latvia commits to ensure that if airBaltic buys back the COVID-19 State equity stake, all conditions in point 63 of the Temporary Framework will be met. Likewise, Latvia commits to ensure that if the State sells its COVID-19 equity stake to purchasers other than airBaltic, all conditions in point 64 of the Temporary Framework will be met17.

2.7.4. Step-up mechanism

(43) Latvia will introduce the following step-up mechanism in order to incentivise airBaltic to redeem the State recapitalisation.

(44) airBaltic will enter into a bilateral agreement with the State (‘State Aid Agreement’) that will bind the company to compensate the State for any use of the COVID-19 equity investment after 5 and 7 years from the date of the capital injection. That compensation will be fixed at an amount that will increase the State’s COVID-19 shareholding in airBaltic by 10% (for each step up). The compensation will be convertible into additional shares at the date of the trigger of the step-up mechanism.

(45) The step-up mechanism will be implemented as follows. With an equity value estimated by the Valuation Report at EUR [50-100] million, a recapitalisation of EUR 250 million will lead to the creation of [700 000 000 – 1 200 000 000] new shares (in addition to the current 256 472 824 shares). In that case, the ex-post shareholding of the State resulting from the COVID-19 equity investment18 would amount to [70-90]% of total shares of airBaltic. Therefore, the application of the first step-up would lead to a 10% increase in the participation resulting from the State’s COVID-19 equity injection that has not been repaid. In that particular case, assuming that no State aid has been repaid, the first step-up would mean an additional [7-9]% ownership due to the COVID-19 equity investment, bringing the shareholding of the State resulting from the COVID-19 intervention to [75 - 95% (70-90% plus 7-9%)]. The second step-up would also lead to an additional [7-9]% ownership due to the COVID-19 equity investment, bringing the COVID-19 State’s shareholding to [85-100]%19.

17 For the sake of clarity, the sale price will never be lower than the market price at the moment.

18 The ex-post total ownership of the State, including the COVID-19 intervention and also pre-COVID-19 shares, will amount to [80-100% ([70-90%] resulting from the COVID-19 equity investment and [10- 20]% from the State’s pre-COVID-19 existing shares).

19 After the first step-up the total ownership of the State will be [80-100% ([75-95%] resulting from the COVID-19 equity investment and [5-15]% from the State’s pre-COVID-19 existing shares), and after

(46) The State Aid Agreement will contain the following core provisions:

- airBaltic will commit to pay the State the compensation in the form of additional shares if the State has not sold 40% of its COVID-19 equity investment within 5 years from the date of capital injection and all of its COVID-19 equity investment within 7 years;

- airBaltic will have an obligation to ensure that any additional shares given to the State increase the State’s COVID-19 shareholding in the company by 10% irrespective of the market value of airBaltic’s shares each time when the step- up mechanism is triggered.

- Once each step-up mechanism is triggered, airBaltic will have an obligation to pay a compensation to the State and it will be done by converting the compensation into additional shares. The State will not have to pay for the additional shares issued by the company for the purposes of the step-up mechanism. The compensation obligation will derive from the State’s COVID- 19 equity investment and will not be related to the financial performance of airBaltic;

- airBaltic will have to receive the consent of the general meeting for the increase of share capital by the amount of compensation and deliver to the general meeting a report from an independent expert in regard to the value of the non- cash consideration invested in the company’s share capital20.

(47) According to Latvia, the result of that contractual step-up mechanism will be that the State will receive twice a 10% additional shareholding and that the existing shareholdings will be further diluted.

(48) The State Aid Agreement will be approved by the General Meeting at the same time as the Measure i.e. in July 2020.

2.7.5. Governance and prevention of undue distortions of competition

(49) Latvia will make the aid conditional upon observance of the elements regarding governance and competition set out in section 3.11.6 of the Temporary Framework.

(50) In particular, as long as at least 75% of the total value of the COVID-19 recapitalisation measure21 has not been redeemed, airBaltic will be prevented from acquiring a more than 10% stake in competitors or other operators in the same line of business, including upstream and downstream operations.

the second step-up it will reach [80-100%] ([80-100%] resulting from the COVID-19 equity investment and [0-10]% from the State’s pre-COVID-19 existing shares).

20 Latvia confirmed that the General Meeting of airBaltic will not be able to block the issuance of new shares, as the State will have sufficient votes to approve alone the issuance of additional shares at the General Meeting when it will be required. The minority shareholder […].

21 Given that the Measure will involve the issuance of different categories of shares with different value, the commitment from Latvia relates to the total value of the recapitalisation (that is EUR 250 million) and not to 75% of the number of shares acquired with the Measure.

(51) Furthermore, as long as the COVID-19 recapitalisation measure has not been fully redeemed, airBaltic will not make dividend payments or non-mandatory coupon payments, or buy back shares, other than in relation to the participation acquired by the State under the Measure.

(52) airBaltic will not increase the remuneration of the members of the management beyond their contractually fixed remuneration on 31 December 2019, before at least 75% of the total value of the COVID-19 recapitalisation measure has been redeemed. For persons becoming members of the management on or after the recapitalisation, the applicable limit is the fixed remuneration of the members of the management with the same level of responsibility on 31 December 2019.

2.7.6. Exit strategy of the State

(53) Prior to the COVID-19 outbreak, airBaltic was on course to undertake a prospective initial public offering (‘IPO’) on the international securities markets.

(54) Latvia indicates that the development and the implementation of a plan for the IPO for […] is still an objective pursued by airBaltic at present. The State intends to sell the additional shares acquired through the Measure during airBaltic’s IPO without decreasing its pre-COVID-19 shareholding level of 80.05%.

(55) In addition, according to Latvia, airBaltic has already presented to the State its Business Plan, which sets out the company’s strategy to overcome the COVID-19 crisis and the use of the State’s investment. However, Latvia will require airBaltic to further detail that strategy within 12 months from the date of the grant of the Measure, in particular regarding the repayment schedule and the organisation of the IPO.

(56) For that purpose, airBaltic will report to Latvia on progress in the implementation of the repayment schedule and compliance with Latvia’s commitments relating to section 3.11.6 of the Temporary Framework within 12 months of the schedule’s presentation, and thereafter periodically every 12 months.

(57) If seven years after the COVID-19 recapitalisation the State’s intervention has not been reduced below 15% of airBaltic’s equity, Latvia will notify a restructuring plan in accordance with the Rescue and Restructuring Guidelines to the Commission for approval.

(58) In addition, Latvia committed to implement all other conditions set in section 3.11.7 of the Temporary Framework.

2.8. Cumulation

(59) The Latvian authorities confirm that aid granted under the Measure may be cumulated with aid under de minimis Regulations22 or the GBER23 provided the provisions and cumulation rules of those Regulations are respected.

(60) The Latvian authorities confirm that aid granted under the Measure may be cumulated with aid granted under other measures approved by the Commission under the Temporary Framework provided the requirements in its specific sections are respected.

2.9. Monitoring and reporting

(61) The Latvian authorities confirm that they will apply the monitoring and reporting obligations laid down in section 4 of the Temporary Framework (including the obligation to publish relevant information on the recapitalisation granted to airBaltic on the comprehensive State aid website or Commission’s IT tool within three months from the moment of granting24).

(62) Latvia also confirmed that airBaltic will, within 12 months from the date of the rights issue and thereafter periodically every 12 months, for a period of three years, publish information on the use of the aid received. In particular, this should include information on how airBaltic’s use of the aid received supports its activities in line with Union objectives and national obligations linked to the green and digital transformation, including the Union economy-wide objective of climate neutrality by 2050 through this aid and in its public advocacy activities25.

(63) Latvia also confirmed that it will report to the Commission annually on the implementation of the repayment schedule and compliance with its commitments relating to section 3.11.6 of the Temporary Framework.

3. ASSESSMENT

3.1. Lawfulness of the Measure

(64) By notifying the Measure before putting it into effect, the Latvian authorities have respected their obligations under Article 108(3) TFEU.

22 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid (OJ L 352, 24.12.2013, p. 1), and Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest (OJ L 114, 26.4.2012, p. 8).

23 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.6.2014, p. 1. The nominal value of the recapitalisation will be included.

24 Referring to information required in Annex III to Commission Regulation (EU) No 651/2014.

25 Under the EU emissions trading system, the net reduction in aviation related emissions between 2013- 2020 is estimated to be 193.4 Mt of CO2 emissions (https://a4e.eu/wp-content/uploads/a4e-fact-sheet- sustainability-commitments-journey-towards-a-greener-air-transport-of-the-future-2020.pdf).

3.2. Existence of State aid

(65) For a measure to be categorised as aid within the meaning of Article 107(1) TFEU, all the conditions set out in that provision must be fulfilled. First, the measure must be imputable to the State and financed through State resources. Second, it must confer an advantage on its recipients. Third, that advantage must be selective in nature. Fourth, the measure must distort or threaten to distort competition and affect trade between Member States.

(66) In the present case, the Measure is imputable to the State, since it is administered by the Government. It is financed through State resources, since it is financed by the State budget.

(67) Furthermore, the Measure grants an advantage to the beneficiary in the form of a recapitalisation. In particular, and as acknowledged by Latvia itself, airBaltic was not able to raise any funds from the market nor was the private shareholder willing to participate in the Measure. Thus, the Measure relieves airBaltic of costs that it would normally have had to bear under normal market conditions.

(68) The advantage granted by the Measure is also selective, since it is granted only to one undertaking.

(69) The Measure is liable to distort competition, since it strengthens the competitive position of airBaltic in a sector in which intra-Union trade is very significant, thus also affecting trade between Member States.

(70) In view of the above, the Commission concludes that the Measure constitutes State aid within the meaning of Article 107(1) TFEU.

3.3. Compatibility

(71) Since the Measure involves aid within the meaning of Article 107(1) TFEU, it is necessary to consider whether that measure is compatible with the internal market.

(72) Pursuant to Article 107(3)(b) TFEU the Commission may declare compatible with the internal market aid “to remedy a serious disturbance in the economy of a Member State”.

(73) By adopting the Temporary Framework on 19 March 2020, the Commission acknowledged (in section 2) that “the COVID-19 outbreak affects all Member States and that the containment measures taken by Member States impact undertakings”. The Commission concluded that “State aid is justified and can be declared compatible with the internal market on the basis of Article 107(3)(b) TFEU, for a limited period, to remedy the liquidity shortage faced by undertakings and ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability”.

(74) The Measure aims at strengthening the equity of airBaltic and its access to liquidity at a time when the normal functioning of markets is severely disturbed by the COVID-19 outbreak and that outbreak is affecting the wider economy and leading to severe disturbances of the real economy of Member States.

(75) The Temporary Framework sets out in its section 3.11 the criteria under which Member States may provide public support in the form of equity to undertakings facing financial difficulties due to the COVID-19 outbreak.

3.3.1. Applicability of section 3.11 of the Temporary Framework

(76) Point 46 of the Temporary Framework states that “the following conditions shall apply to recapitalisation schemes and individual recapitalisation measures of Member States for non-financial undertakings (collectively referred to as “COVID-19 recapitalisation” measures) under this Communication, which are not covered by section 3.1 of this Communication. They apply to COVID-19 recapitalisation measures for large undertakings and SMEs”.

(77) The Commission considers that the Measure concerns an individual recapitalisation in favour of a large undertaking resulting from the COVID-19 outbreak. Hence, the Measure notified by Latvia can be qualified as a COVID-19 recapitalisation for the purposes of section 3.11 of the Temporary Framework.

3.3.2. Eligibility and entry conditions

(78) Point 45 of the Temporary Framework states that public support in the form of an equity capital instrument should only be considered if no other appropriate solution can be found.

(79) In addition, according to point 49 of the Temporary Framework, the COVID-19 recapitalisation measure must fulfil the following conditions:

a) without the State intervention the beneficiary would go out of business or would face serious difficulties to maintain its operations. Such difficulties may be shown by the deterioration of, in particular, the beneficiary's debt to equity ratio or similar indicators;

b) it is in the common interest to intervene. This may relate to avoiding social hardship and market failure due to significant loss of employment, the exit of an innovative company, the exit of a systemically important company, the risk of disruption to an important service, or similar situations duly substantiated by the Member State concerned;

c) the beneficiary is not able to find financing on the markets at affordable terms and the horizontal measures existing in the Member State concerned to cover liquidity needs are insufficient to ensure its viability; and

d) the beneficiary is not an undertaking that was already in difficulty on 31 December 2019 (within the meaning of the GBER26).

(80) According to point 50 of the Temporary Framework, Latvia should provide evidence of a written request for a recapitalisation aid by the prospective beneficiary as part of the notification of the individual aid measure to the Commission.

26 As defined in Article 2(18) of the GBER.

3.3.2.1. Without the State intervention airBaltic would go out of business or face serious difficulties to maintain its operations

(81) In the present case, the Commission first notes that airBaltic is bound by the 2019 Bond covenant to maintain a level of cash above a certain threshold at all times. airBaltic’s current liquidity position is such that, without the aid, the bond covenant will be breached and airBaltic would need to repay more than EUR 200 million of bonds as of […], thus aggravating its current fragile financial position and putting the company in a serious risk of default on the very short term.

(82) In addition, the Commission observes that airBaltic has faced substantial losses due to the COVID-19 outbreak, with its fleet being almost fully grounded for about three months. Resumption of flights is slowly starting, following the progressive opening of borders within the Union at the time of the present decision, in a context of a still uncertain future that particularly affects the airline sector. AirBaltic will register substantial losses (at least EUR [200-300] million, from an equity position of EUR [20-70] million in December 2019) despite all its cost reductions and payment deferrals.

(83) It follows that without the aid, airBaltic would face serious difficulties to maintain its operations, in accordance with point 49(a) of the Temporary Framework.

3.3.2.2. It is in the common interest to intervene

(84) The Commission will assess the common interest to intervene first by analysing in the present sub-section the role of airBaltic’s services for the connectivity of Latvia and then by evaluating its importance for the national economy.

Connectivity of Latvia

(85) The Commission observes that airBaltic is the biggest Latvian airline as well as the largest carrier operating in Latvia27. From its hub in Riga, it connects Latvia and the wider Baltic region with important political and business centres across Scandinavia and the rest of Europe through regular flights. airBaltic also ensures flights to intercontinental destinations from Latvia.

(86) In 2019, airBaltic operated flights to 72 destinations during the summer and to 50 destinations during the winter. Once air traffic can resume during the summer of 2020, the company plans to fly [40-50] routes.

(87) For example, in summer 2019, airBaltic operated more than 10 weekly flights to 23 destinations, including London, Brussels, Stockholm, Copenhagen, Amsterdam, Helsinki, Berlin and Tallinn. AirBaltic projects to maintain more than 10 weekly flights to those destinations for the summer 2020.

27 According to the Latvian civil aviation authority, Latvia’s three international airports handled 7 812 464 passengers in 2019, out of which 4 483 102 passengers were transported by airBaltic (representing approximately 90% of the total passengers transported by airBaltic).

(88) Table 1 confirms Latvia’s claim that airBaltic offers not only the widest choice of destinations from Riga (main international airport in Latvia) but also the highest flight frequency operated from Riga:

Table 1: Flight frequency of major air carriers at Riga airport in 2019

Destinations from airBaltic Ryanair Wizzair Norwegian Aeroflot Finnair Lufthansa SAS Riga

Total routes [70-80] [10-20] [10-20] [0-10] [0-10] [0-10] [0-10] [0-10]

Routes operated min [20-30] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] 10 times/week

Routes operated min [30-40] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] 5 times/week

Source: airBaltic, Cirium28.

(89) Thus airBaltic ensures substantial and regular connections from Latvia to essential European business centres, which are unlikely to be replicated by other competitors to the same extent. The Commission also considers that airBaltic is well-placed to help Latvia’s economy recover after the crisis, as it is the only airline that connects Latvia to major business centres with high frequency.

Importance of airBaltic for the Latvian economy

(90) As indicated in recital (21), Latvia carried out in 2019 a study on the importance of airBaltic for the Latvian economy. The study concluded that, taking into account all direct, indirect and catalytic effects, airBaltic contributed to 2.5% of Latvia’s GDP in 2018, which amounted to approximately EUR 730 million.

(91) Air services play a major role in the economy of Latvia, in particular when considering the relatively remote position of Latvia within the Union. Several businesses in Latvia depend on air services to connect with the main business centres in the rest of the Union, for which alternative modes of transport are not able to meet their needs29. International trade and investments also rely importantly on those air connections, as highlighted both by the Roland Berger’s study and an IATA report30. Moreover, airBaltic employs directly 1 800 workers and up to 30 000 jobs may be directly or indirectly linked to air services that are mainly operated in Latvia by airBaltic. The latter also constitutes one of the major Latvian company.

(92) It follows that airBaltic’s contribution to the Latvian economy is significant and its failure could severely affect the Latvian economy and its connectivity in the context of the COVID-19 crisis. Therefore, the Commission concludes that there exist a

28 The date for airBaltic are provided by airBaltic. The rest of the date displayed in the Table come from the consultancy and data firm Cirium, which is specialised in data analytics in the aviation sector (https://www.cirium.com/who-we-are/).

29 The study referred in particular to the tourism sector.

30 See https://www.iata.org/en/iata-repository/publications/economic-reports/latvia--value-of-aviation/.

common interest for the Latvian State to intervene in order to prevent the negative effects of a potential failure of airBaltic, in accordance with point 49(b) of the Temporary framework.

3.3.2.3. AirBaltic is not able to find financing on the markets at affordable terms and other horizontal measures existing in Latvia to cover liquidity needs are insufficient

(93) The Commission notes that the debt incurrence covenant of the 2019 Bonds prevents airBaltic from taking a loan from the market or the State to ensure its liquidity needs. If airBaltic decided to repay the Bonds, it would need to raise EUR 200 million on the market in addition to what it needs to cover losses resulting from the COVID-19 outbreak. In view of the substantiallosses of airBaltic, and its negative equity position if no aid is granted, it would likely encounter serious difficulties to raise funding.

(94) Further, airBaltic […], so that it would in any event not be able to obtain a loan from a bank on acceptable terms given the current state of the airline industry.

(95) In addition, airBaltic has also tried to obtain financings from its minority shareholder. However, the minority shareholder ultimately refused to participate in the Measure as […].

(96) Finally, the Commission notes that at the date of the present decision, the horizontal measures available in Latvia are limited to a scheme adopted by Latvia concerning the grant of State guarantees or loans with subsidised interests, with an overall budget of EUR 250 million31. However, airBaltic may not obtain aid under that scheme, not only because of the debt incurrence covenant that prevents it from contracting loans from the State, but also because of the budget of the scheme, which would be insufficient to cover its liquidity needs.

(97) Therefore, in accordance with point 49(c) of the Temporary Framework, there is no other appropriate measure to support the needs of airBaltic, and Latvia demonstrated that there was no alternative financing on the markets to cover airBaltic’s liquidity needs.

3.3.2.4. Undertaking in difficulty

(98) AirBaltic is not an undertaking that was already in difficulty on 31 December 2019 (within the meaning of the GBER), in accordance with point 49(d) of the Temporary Framework.

3.3.2.5. Submission by the beneficiary of a written request for a capital injection

(99) On 28 April 2020, airBaltic made a written request to Latvia for a recapitalisation, which is in line with point 50 of the Temporary Framework.

31 See Commission decision SA.56722 (2020/N) of 23 March 2020, COVID-19: Loan guarantee scheme and subsidised loan scheme, OJ C 112, 03.04.2020, p. 1.

3.3.2.6. Conclusion

(100) In view of all the above, the Commission concludes that airBaltic fulfils the eligiblity and entry conditions for COVID-19 recapitalisation measures set out in section 3.11.2 of the Temporary Framework.

3.3.1. Types of recapitalisation measures

(101) Point 53 of the Temporary Framework allows the State intervention to take the form of an equity capital instrument. In that regard, the Member States must ensure that the equity capital instrument and the conditions attached thereto are appropriate to address the beneficiary’s recapitalisation needs while at the same time being the least distortive to competition.

3.3.2. Amount of the recapitalisation

(102) In order to ensure proportionality of the aid, point 54 of the Temporary Framework has two cumulative conditions. First, the amount of the COVID-19 recapitalisation must not exceed the minimum needed to ensure the viability of the beneficiary. Second, it should not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak, i.e. the situation on 31 December 2019. In assessing the proportionality of the aid, State aid received or planned in the context of the COVID-19 outbreak shall be taken into account.

(103) First, in order to assess whether the aid corresponds to the minimum needed to restore the capital structure of airBaltic to the one before the COVID-19 outbreak, the Commission will take into account the financial projections concerning (i) the equity position of the beneficiary and (ii) the net debt-to-book equity ratio of the beneficiary after the recapitalisation. The Commission will compare the value of those indicators with those predating the COVID-19 outbreak, i.e. the situation on 31 December 2019.

(104) airBaltic’s capital amounted to EUR [20-70] million on 31 December 2019. As indicated in recitals (6) and (10), it is currently expected that airBaltic will suffer losses of at least EUR [200-300] million and that its capital will decrease to minus EUR [150-250] million by December 2020.

(105) The Commission considers that if the Measure is carried out, airBaltic’s capital will amount to EUR [20-70] million in December 2020, which is lower than the equity level of that on 31 December 2019.

(106) Regarding the net debt-to-book equity ratio of the beneficiary, as of 31 December 2019 it was 15x, whereas after the measure the ratio will be restored to 15x in December 2020, and will remain at the same 15x level in December 2021. Thus, the Measure will not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak.

(107) Therefore, the Measure does not restore the capital structure of airBaltic beyond what is was as of 31 December 2019.

(108) Second, in order to assess whether the aid corresponds to the minimum needed to ensure the viability of the beneficiary, the Commission will take into consideration

airBaltic’s equity and liquidity positions, and in particular the breach of existing convenants, to analyse the minimum recapitalisation needed.

(109) After the capital injection, the monthly equity position of airBaltic from 30 December 2020 onward is planned to evolve as set out in Table 2:

Table 2: Book equity value of airBaltic for the first half of 2021 after the capital injection (EUR mln)

Dec Jan. Feb Mar Apr May Jun 2020 2021

Equity [35-45] [25-35] [15-25] [5-15] [5-15] [5-15] [15-25]

(110) According to the figures in Table 2, the book equity value of airBaltic after the capital injection will be […] during months of March and April 2021 (i.e. EUR [5- 15] million and EUR [5-15] million respectively)32. A negative book equity value could trigger a technical insolvency of the airline, and in any case the company needs a minimum buffer to cope with potential negative shocks in 2021. The Commission considers that a capital increase of less than EUR 250 million, which would reduce the buffer in March and April 2021 to […], could translate into a significantly stressful financial situation for airBaltic in […], thus risking to a great extent the future viability of airBaltic.

(111) In addition, the Commission notes that, without the capital injection, airBaltic is expected to be in a negative cash position as of […], which could decrease to minus EUR [50-100] million by the end of the year 2020. That situation would lead to a breach of the 2019 Bonds covenant (i.e. airBaltic must have a minimum cash position of EUR 25 million)33 that would trigger the immediate repayment of more than EUR 200 million of bonds as of […], aggravating the liquidity situation of airBaltic and putting it in a serious risk of default as of […]. After the capital injection, that short term situation in 2020 should be restored to normal, but the Commission observes that nevertheless from […] on, the cash position of airBaltic is forecasted to worsen significantly, reaching yearly minimums of EUR […] million and EUR […] million, as of […] and […] respectively, very close to the minimum cash position required to avoid the repayment of the 2019 Bonds.

(112) It follows from those elements that the aid does not exceed the minimum needed to ensure the viability of airBaltic.

32 A book equity value of EUR [5-25] million, in a company with yearly revenues of around EUR [300- 500] million, represents roughly [2-5]% of total revenues. Consequently, that equity level, in relative terms, is very close to zero and could easily become negative if the company faced a negative shock in year 2021 or before.

33 See recital (8).

(113) The Commission also notes that airBaltic did not receive or does not plan to receive any other aid in the context of the COVID-19 outbreak.

(114) The Commission therefore concludes that the aid is proportionate as it does not exceed the minimum needed to ensure the viability of the beneficiary and does not go beyond restoring the capital structure of airBaltic as of 31 December 2019.

3.3.3. Remuneration and exit of the State

3.3.3.1. Pricing of the recapitalisation

(115) According to point 60 of the Temporary Framework, a capital injection by the State must be conducted at a price that does not exceed the average share price of the beneficiary over the 15 days preceding the request for the capital injection. If the beneficiary is not a publicly listed company, an estimate of its market value should be established by an independent expert or by other proportionate means.

(116) The written request for a capital injection was made on 28 April 2020 (see recital (19)). As the company is not a publicly listed company, an independent expert established the Valuation Report to estimate the market value of airBaltic. The share price was estimated on 30 April 2020 at EUR [0-1].

(117) The Commission considers that the date retained by the Valuation Report (30 April 2020) is acceptable in the present case. First, the Valuation Report was made by taking into account the Business Plan adopted on 24 April 2020, which takes into account the impact of the COVID-19 outbreak and gives a reliable picture of the situation of the company in April 2020. In addition, the Valuation Report takes the date of 30 April 2020, that is six days following the adoption of the Business Plan. Given that airBaltic is a non-publicly-listed company and that the Business Plan future projections do not change within a period of a week, the Commission notes that, for the purpose of the valuation of airBaltic, the market value of the company stayed stable over the period of six days (four days before the written request). Therefore, the Commission considers that the share price value estimated by the Valuation Report reflects the value of the company over April 2020.

(118) The Valuation Report used a Discounted Cash Flows valuation model, whose main results were an Enterprise Value (EV) of EUR [350-450] million and a 100% equity value of EUR [50-100] million for airBaltic. Taking into account that airBaltic holds 256 472 824 outstanding shares, the market share price was calculated at EUR [0-0.5] as of 30 April 2020 (see section 2.7.1.2). The implied 2019 EV/EBITDA multiplier is calculated at [0-5]x, which is below the average of the industry ([0-5]x).

(119) The Commission finds that the Valuation Report (see section 2.7.1.1) is established on sound and credible business projections.

(120) First, the traffic hypotheses retained by the Valuation Report are in line with the industry forecasts34, which anticipates the airline sector to reach its pre-COVID-19

34 See IATA report “COVID-19: Outlook for air travel in the next 5 years”, of 13 May 2020. https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-outlook-for-air-travel- in-the-next-5-years/.

levels in the first half of 2023. From 2023 on, airBaltic’s traffic forecast returns to the growth levels the company was experiencing for the past three years pre- COVID. The Commission believes that it is reasonable in view of the company’s past performances35, its increase in capacity to cover such growing demand in line with its programme of acquisition/leasing of aircrafts, and its planned transition to a low-cost-like business model. In addition, airBaltic is operating mainly in the Baltic region, where the market is maturing with a growing demand for air services, in particular to the rest of the Union.

(121) Secondly, airBaltic’s assumptions for the financial projections are in line with average values of comparable companies in the sector, taking also into account the fact that the company is transitioning to a more cost-efficient model comprising the use of a single and larger type of aircraft. For example, the EBITDA margin is set at [10-20]% for the terminal value, in line with peers’ average evaluated by the Valuation Report at [10-20]%36. As an additional element, the Commission notes that the CAPEX projection for the terminal value (EUR [15-35] million) is estimated taking into account average values during long cycles of maintenance for the specific aircraft that airBaltic is operating. That CAPEX run rate value is indeed in line with future projected run rate depreciation for the company.

(122) Thirdly, as discount factor, the Valuation Report uses a WACC of [5-15]%. For its estimation and particularly for the cost of equity, the Valuation Report uses the Capital Asset Pricing Model (“CAPM”). The Commission has verified that all assumptions used in those calculations were based on current market values or on conservative assumptions based on comparable companies of the market.

(123) Finally, the Valuation Report includes all projected losses of airBaltic resulting from the COVID-19 outbreak (in particular for 2020, but also for subsequent years), thus ensuring a conservative valuation.

(124) Taking into account an ex-ante valuation of EUR [50-100] million for 100% of the equity of airBaltic and the capital injection of EUR 250 million in 2020, the ex-post ownership of the Latvian State will reach [80-100]%, comprised of [75-95]% for the COVID-19 State intervention and [10-20]% for its ex-ante shares. The other shareholder’s stake in airBaltic will be diluted to [0-10]% from its ex-ante 19.95% ownership.

(125) Given that the entry price of the State will be on average EUR [0-1], the pricing of the Measure will therefore not exceed the estimated market price of airBaltic’s shares.

35 Over the period 2016-2019, the number of passenger flying with airBaltic grew at an average rate of 18% year on year and by 74% in total. Further, over the same period, airBaltic’s revenue per passenger kilometre grew at an average rate of 20% year on year. This is much higher than the industry average growth, for which according to IATA, the total revenue per passenger kilometre grew at rate of 7% to 8% year on year over the period 2016-2019 (See IATA, « Annual review 2019 », p. 13 and « Annual review 2017 », p. 12, available at https://www.iata.org/en/publications/annual-review/).

36 The peers group includes low-costs carriers as well as other comparable airlines such as Finnair or SAS.

3.3.3.2. Step-up mechanism

(126) The Measure notified by Latvia includes a step-up mechanism that is line with point 61 of the Temporary Framework (see section 2.7.4).

(127) Firstly, the Commission observes that the mechanism envisaged by Latvia provides for the creation of additional 10% of COVID-19 shareholding in favour of the State after five years (if 40% of the State’s equity participation resulting from the COVID-19 equity injection is not redeemed by then) and additional 10% of COVID-19 shareholding again seven years (if all of the shares acquired under the Measure are not redeemed) from the date of the capital injection. There will be no need for the State to pay anything for the additional shares (see recitals (44) and (45)).

(128) Secondly, the step-up will not generate costs for the State. To execute the potential step-ups, in years 5 and 7 after the State intervention, airBaltic will pay a compensation to Latvia (see recital (46)). The company will issue the additional shares for the step-ups to be used as payment-in-kind for its compensation to the State. Consequently, the implementation of the step-up mechanism will be cash- neutral for airBaltic, and cost-free for the State.

(129) Thirdly, Latvia confirmed that the general meeting of airBaltic will not be able to block the issuance of new shares, as the State will have sufficient votes to approve alone the issuance of additional shares at the General Meeting (see recital (46)). The minority shareholder […].

(130) Lastly, the step-up mechanism will lead to a further dilution of the minority shareholder and hence a decrease in the value of its stake in the airline. If airBaltic receives a total of EUR 250 million as capital increase and the two rounds of step- ups are triggered in years 5 and 7, the minority private shareholder’s ownership will be diluted to [0-10]% (see recital (47)).

(131) Therefore, the Commission considers that the step-up mechanism proposed by Latvia respects point 61 of the Temporary Framework.

(132) In addition, Latvia committed to comply with points 63 and 64 of the Temporary Framework.

3.3.3.3. Conclusion

(133) The Commission concludes that the remuneration of the State and the State’s exit mechanism respect the conditions set in section 3.11.5 of the Temporary Framework.

3.3.4. Governance and undue distortion of competition

(134) According to point 71 of the Temporary Framework, the beneficiary of a COVID- 19 recapitalisation should not engage in aggressive commercial expansion. The business plan of airBaltic shows that the company is preparing a progressive return to its pre-COVID projects. In addition, airBaltic will respect the conditions referred to in section 3.11.6 of the Temporary Framework.

3.3.4.1. Existence of a significant market power on a relevant market on which airBaltic operates

(135) According to point 72 of the Temporary Framework, if the beneficiary of a COVID-19 recapitalisation measure above EUR 250 million is an undertaking with significant market power on at least one of the relevant markets in which it operates, Member States must propose additional measures to preserve effective competition in those markets. The Commission notes that the recapitalisation measure under assessment does not exceed EUR 250 million and that, therefore, Latvia is not required to propose additional measures under point 72 of the Temporary Framework.

(136) Nevertheless, given that the Measure amounts to exactly EUR 250 million and that the amount initially notified to the Commission exceeded that threshold (see recital (13)), the Commission considers appropriate in this case to carry out an assessment of the existence of a significant market power on any of the relevant market on which the beneficiary operates.

Identification of the relevant markets

(137) The Commission has, in its prior decision practice related to mergers in the air transport sector, defined the relevant markets for scheduled passenger air transport services on the basis of two approaches: (i) the "point of origin/point of destination" ("O&D") city-pair approach, where the target was an active air carrier37; and (ii) the "airport-by-airport" approach, when the target included an important slot portfolio38.

(138) Under the O&D approach, every combination of an airport or city of origin to an airport or city of destination is defined as a distinct market. Such a market definition reflects the demand-side perspective whereby passengers consider all possible alternatives of travelling from a city of origin to a city of destination, which they do not consider substitutable for a different city pair.

(139) While the Commission has given pre-eminence to demand-side substitution, it has also acknowledged that, from the supply-side perspective, competition between air carriers also takes place on the network level, as network carriers build their network and decide to fly essentially on routes connecting to their hubs39. Some

37 See e.g. Cases M.8869 – Ryanair/LaudaMotion, paragraphs 96-97; M.7541 – IAG/Aer Lingus, paragraph 14; M.7333 – Alitalia/Etihad, paragraph 63; M.6447 – IAG/bmi, paragraph 31.

38 See e.g. Cases M.8869 – Ryanair/LaudaMotion, paragraph 116; M.8672 – easyJet/Certain Air Berlin Assets, paragraph 41; M.8633 – Lufthansa/Certain Air Berlin Assets, paragraph 58; M.6447 – IAG/bmi, paragraph 483. For Cases M.8672 – easyJet/Certain Air Berlin Assets and M.8633 – Lufthansa/Certain Air Berlin Assets, the Commission only carried out an airport-by-airport assessment, since the target assets were not used on any route at the time of the transaction (Air Berlin had definitively ceased its flight operations on all routes due to its insolvency).

39 See e.g. Cases M.7541 – IAG/Aer Lingus, paragraphs 17-18; M.6607 – US Airways/American Airlines, paragraph 10; M.6447 – IAG/bmi, paragraph 31.

low-cost carriers also claimed that, with the growth of point-to-point airlines, supply-side substitution is an increasingly important aspect of market definition40.

(140) Under the airport-by-airport approach, every airport (or substitutable airport) is defined as a distinct market. Such a market definition enables the Commission to assess the effects of a transaction on the operation of passenger air transport services at a given airport on the basis of the slot portfolio held by a carrier at the airport, without distinguishing between the specific routes served to or from that airport.

(141) The airport-by-airport approach has notably been adopted to assess the effects of the strengthening of an airline's position at certain airports and the risks to effective competition entailed by the concentration of slots at certain airports in the hands of a single undertaking41. The Commission has indeed noted, in the framework of its airport policy, that "slots are a rare resource" and "access to such resources is of crucial importance for the provision of air transport services and for the maintenance of effective competition."42. In addition, the Commission has aggregated all routes originating or terminating in an airport for the purpose of defining the relevant situation absent the transaction of an air carrier which would have entered into insolvency proceedings43.

(142) For those reasons, the Commission considers that the markets in which the beneficiary operates that are relevant for the purposes of assessing the distortive effects of the Measure on competition are the markets for the provision of passenger air transport services to and from the airports served by the beneficiary. That conclusion is reinforced by the fact that the Measure aims at preserving the overall ability of the beneficiary to operate air transport services, notably ensuring the preservation of its assets and its rights to operate in the medium/long term. Those assets and rights are not assigned, in principle, to any particular route. This is particularly true for slots at a coordinated airport,44 which may be highly valuable and may be used on any route to and from the airport45.

40 See e.g. Case M.6663 – Ryanair/Aer Lingus III, paragraph 57.

41 See e.g. Case Case M.8869 – Ryanair/LaudaMotion.

42 Recital (4) of the Commission Proposal for a Regulation of the European Parliament and of the Council on common rules for the allocation of slots at European Union airports (COM/2011/827 final of 01 December 2011).

43 See Case M.6447 – IAG/bmi, paragraphs 136-157.

44 According to Article 2 of Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports (OJ L14, 22.1.1993, p. 1) (the ‘Slot Regulation’), a ‘coordinated airport’ means ‘an airport where a coordinator has been appointed to facilitate the operations of air carriers operating or intending to operate at that airport’.

45 See presentation by DLH “SA.57153 –Deutsche Lufthansa Revised Proposal and its Effects” dated 26 May 2020, page 4: “Slots can be utilized flexibly through a large slot portfolio and ensures feeder traffic to hub, enabling LH Group to be competitive on long-haul routes. Flexibility is even more important for hub systems in the next years as hygiene standards and control mechanisms will impact connectivity, e.g. by factoring in significantly longer minimum connecting times) and therefore require nimble adaptations of flight schedules.”

(143) Therefore, if the Measure has an impact on competition, it will equally affect competition on all routes originating and arriving at an airport at which the beneficiary holds slots, regardless of the specific competitive position of the beneficiary on any of those routes. It is thus not appropriate to analyse the impact of the Measure on each of those routes separately. Instead, for the purposes of the compatibility assessment, it is appropriate to define the relevant markets as the airports at which the beneficiary supplies passenger air transport services. The beneficiary’s power on such a relevant market will be assessed inter alia on the basis of the level of congestion of the airport and the beneficiary’s share of airport infrastructure capacity that it has the permission to use for its operations (i.e. share of slots)46.

Overview of the relevant airports for airBaltic

(144) In the present case, Latvia indicated that airBaltic operates a base in Riga airport as well as in Vilnius airport and Tallinn airport.

(145) Riga Airport (RIX) is airBaltic’s hub and main operating base. For the time being, RIX is not a slot coordinated airport, although there exist plans to collect data of the actual flight schedules for best use of the available airport infrastructure capacity. According to current collection of data, RIX would be operating as a Level 1 airport, so that the capacity of the airport infrastructure would be generally adequate to meet the demands of airport users.

(146) Based on 2019 passenger figures, airBaltic’s passenger traffic represented [50- 70]% of the airport’s total passenger traffic. However, the Commission notes that RIX is not a coordinated airport, as the capacity limitations are so far manageable and do not constrain the scheduling of airlines in Riga. Therefore, airBaltic does not hold slots or any historic rights to slots in RIX that would prevent other airlines to schedule flights.

(147) The Commission notes that current runaway capacity in mixed mode (arrivals + departures) is 29 movements per hour. Based on the data provided by Latvia, the airBaltic’s share of movements at Riga airport reached an average of less than [30- 40]% in Summer 2019, reaching a maximum of [50-60]% in only one peak hour. During the same IATA season in Summer 2019, Riga’s average congestion rate was below 43%, thus showing significant free available capacity at the airport.

(148) As regards Vilnius and Tallinn airports, airBaltic’s passenger traffic represented respectively [5-15]% and [30-40]% of the airport’s total passenger traffic. In addition, both airports are not congested and they are not coordinated airports.

(149) In light of all the above, it follows that, for the purposes of this decision, airBaltic has no significant market power at any of the airports at which it operates. The Commission considers that the conditions under which Latvia would be required to propose additional measures pursuant to point 72 of the Temporary Framework are not fulfilled.

46 See examples by analogy: Case M.8633 – Lufthansa/Certain Air Berlin assets; Case M.8672 – easyJet/Certain Air Berlin assets.

3.3.4.2. Other conditions under section 3.11.6 of the Temporary Framework

(150) Latvia confirms that airBaltic will comply with all the conditions contained in point 73 to 78 of the Temporary Framework (see recital (49)).

(151) In addition, Latvia commits to ensure that if airBaltic buys back the COVID-19 State equity stake, all conditions in point 63 of the Temporary Framework will be met. Likewise, Latvia commits to ensure that if the State sells its COVID-19 equity stake to purchasers other than airBaltic, all conditions in point 64 of the Temporary Framework will be met47.

3.3.4.3. Conclusion

(152) The Measure complies with section 3.11.6 of the Temporary Framework and no additional competition measure is required from Latvia.

3.3.5. Exit strategy of the State from the participation resulting from the recapitalisation and reporting obligations

(153) According to point 79 of the Temporary Framework, beneficiaries other than SMEs that have received a COVID-19 recapitalisation of more than 25% of equity at the moment of intervention must demonstrate a credible exit strategy for the participation of the Member State, unless the State’s intervention is reduced below the level of 25% of equity within 12 months from the date of the granting of the aid.

(154) As explained in recital (55), airBaltic has prepared and submitted to the State its Business Plan presenting the continuation of its activity and the use of the funds invested by the State. As for the repayment schedule, airBaltic has the objective of launching an IPO in […] during which the State will sell the shares acquired through the Measure.

(155) The Commission considers that although Latvia has presented indications on an exit strategy of the State from its COVID-19 participation, that exit strategy will need to be further detailed, in particular regarding the repayment schedule and the organisation of the IPO.

(156) In that regard, Latvia commits to receive and endorse a credible exit strategy within 12 months after the aid is granted, unless the State’s intervention is reduced below the level of 25% of equity by that deadline, in line with points 79 to 81 of the Temporary Framework.

(157) In addition, Latvia commits to comply with all other conditions contained in section 3.11.7 of the Temporary Framework (see recitals (57) and (58)).

(158) Therefore, the Measure complies with section 3.11.7 of the Temporary Framework.

47 For the sake of clarity, the sale price will never be lower than the market price at the moment.

3.3.6. Section 4 of the Temporary Framework

(159) Latvia confirmed that it will apply the reporting and monitoring obligations contained in section 4 of the Temporary Framework (see recital (61)).

3.3.7. Conclusion

(160) The Commission therefore considers that measure is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State pursuant to Article 107(3)(b) TFEU.

4. CONCLUSION

The Commission has accordingly decided not to raise objections to the aid on the grounds that it is compatible with the internal market pursuant to Article 107(3)(b) of the Treaty on the Functioning of the European Union.

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/competition/elojade/isef/index.cfm.

Your request should be sent electronically to the following address:

European Commission, Directorate-General Competition State Aid Greffe B-1049 Brussels [email protected]

Yours faithfully,

For the Commission

Margrethe VESTAGER Executive Vice-President