EU Rules Alitalia’s €900m Loans Are Illegal

On September 10th, the European Commission publicly announced its disapproval of two loans granted to Alitalia by the Italian government, stating that they were illegal under State aid rules. The Commission states that the Italian government must now recover the €900m worth of loans from Alitalia, which is soon to cease operations.

Alitalia Airbus A330-202 EI-EJK
The two loans were issued to Alitalia in 2017. Photo: Vincenzo Pace | Simple Flying

In a lengthy statement issued by Executive Vice-President of the European Commission, Margrethe Vestager, it was proclaimed that Italy’s loans to Alitalia were illegal under rules regarding State aid.

Why was Alitalia in need of State aid?

“Alitalia’s financial difficulties go back a long time. There have already been a number of attempts to restructure the airline…” Vestager states, adding that, since 2008 (after a group of private investors purchased a controlling stake), the company has made losses every year.

Alitalia’s losses continued to compile, leading to an urgent need for more funds in 2017. That same year, Etihad stated that it would no longer be investing in the airline. With no one to turn to, the Italian government issued two loans with a total value of €900m and placed the airline in special bankruptcy proceedings.

Etihad Boeing 787-9
Etihad had been a significant investor in Alitalia in the years leading up to the first round of loans from the Italian government. Photo: Vincenzo Pace | Simple Flying

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Loans to Alitalia deemed illegal

Spurred on by complaints by other airlines, the EU Commission opened a formal investigation the year after Italy issued the loans to Alitalia.

“With respect to the €900m loans, the in-depth investigation has shown that first, the loans amount to State aid for Alitalia, and second that they are illegal under State aid rules.” -Margrethe Vestager, Executive Vice-President of the European Commission

Here are the key points which support the EU’s ruling on Italy’s loans:

  • When Italy granted these loans, it did not make a prior assessment on the likelihood of loan repayment.
  • EU evaluation of Alitalia’s 2017 situation found that repayment “was very unlikely,” it adds that the loans even remain unpaid to this day.
  • Since no private lender would have granted the loans to Alitalia at the time, they amount to State aid in favor of the company.

There would have been an allowance for Italy to provide rescue funding to Alitalia, however. This would have been the case if loans were repaid within six months and a restructuring or liquidation plan was developed. Unfortunately, none of these criteria for legal State aid were met.

The Commission has concluded that, as a result of Italy’s loans, Alitalia had “an unfair advantage over its competitors on national, European and world routes.”

It should be noted that another investigation is ongoing with regards to a similar loan granted from Italy to Alitalia at the end of 2019. Given Friday’s ruling, it seems quite likely that another proclamation of illegal State aid will be issued.

EU Rules Alitalia’s €900m Loans Are Illegal
Alitalia benefited from connections and codeshares with Delta, but ITA won’t have that benefit. Photo: Vincenzo Pace | Simple Flying

One rather interesting decision from Friday is that “Italy must now recover this amount from Alitalia.” With the airline soon to cease operations and revenue slowing down as a result, how will the hundreds of euros be recovered by the government?

Well, this will likely be made possible (at least in part) from the liquidation and sale of Alitalia assets, including any aircraft that it owns outright, as well as the sale of its loyalty program and brand.

ITA not liable to repay Alitalia’s illegal loans

With Alitalia soon to cease operations, giving way to new airline ITA, the Commission has made it clear that the new carrier will not be ‘on the hook’ for repaying the loans. Vestager’s statement notes,

“Under our rules, a new company is not liable for past aid received by the seller, if the two companies are sufficiently different from one another. In other words, if there is a clear break between them, so-called ‘economic discontinuity’.”

The reasons for this decision and the justification of ‘economic discontinuity’ are summarized as follows:

In terms of assets transferred, ITA will launch with reduced operations, flying less than half of Alitalia’s aircraft to fewer destinations. Indeed, ITA will use fewer take-off and landing slots than Alitalia had in its possession.

  • ITA will not take over Alitalia’s ground handling and maintenance businesses.
  • The Alitalia brand will be sold off.
  • ITA will have a different cost structure than Alitalia, including a smaller workforce.
  • Ensuring that there is no direct transfer of customers from Alitalia, ITA will not bid for Alitalia’s loyalty program.
ITA Italia Trasporto Aereo
ITA is set to be a fairly different airline from Alitalia. Photo: ITA

In addition to declaring ITA free from repaying Alitalia’s debt, the European Commission also stated that planned capital injections worth €1.35b from the Italian government do not constitute State aid under EU rules, saying:

“Our assessment of ITA’s business plan has shown that Italy is investing in ITA in line with market conditions. This is also confirmed by three independent expert reports submitted by Italy.”

The government funding will be injected over the next three years, with an initial €700m granted this year.

“Restoring a level playing field”

“Both decisions are important to help restore a level playing field in the European aviation sector…” Vestager writes. This will ensure air connectivity in Italy while also protecting consumer rights.

Vestager states that the European Commission’s decisions and actions have been made in the interests of passengers, making it clear that Italy will “fully refund Alitalia customers, in case Alitalia fails to honor tickets when it stops flying.”

What do you think of the European Commission’s decision that Italy’s loans were illegal? Do you agree or disagree? We’d love to hear your thoughts and opinions by leaving a comment.