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European Commission has formally opened a previously announced in-depth investigation into the state aid for LOT Polish Airlines

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As previously announced, the European Commission has officially published its decision to open the in-depth investigation into the state aid for LOT Polish Airlines. This is the next step of a standard procedure for entities applying for such aid. At the same time, the Commission published the underlying principles and elements of LOT Restructuring Plan in order to submit them to consultation with aviation market participants.

In November 2013 the Commission decided to open the in-depth investigation into the restructuring aid for LOT. Presently, only a formal decision initiating this procedure was published. This document inter alia describes the main elements and underlying principles of LOT Restructuring Plan, inviting all interested parties (e.g. competitors) to submit their comments within one month. Poland will be able to respond to these comments.

The Commission is obliged to present in its decision issues that require consultation with the aviation industry. Their answers are aimed to help the Commission to fully assess and accept LOT Restructuring Plan. Therefore, in accordance with a standard practice, the published document has a form of a list of questions and issues that require clarification.

 

The same process was followed in the case of other EC investigations into the restructuring of European airlines, which have successfully undergone the “formal investigation” procedure. They included among others the Czech Airlines (CSA), Air Malta, Cyprus Airways or the Austrian Airlines. When initiating formal proceedings regarding these carriers, the European Commission expressed serious doubts as to key aspects of their restructuring plans. Nevertheless, those proceedings ended with positive decisions. The Commission highlighted four key issues. Firstly, credibility of the examined restructuring plan and its underlying principles, secondly adequacy of compensatory measures, thirdly an amount and adequacy of own contribution tothe restructuring plan and fourthly doubts whether earlier transactions made by the carrier did not involve state aid. Questions regarding the same issues are formulated towards LOT. The European Commission is currently conducting ca 70 investigations into state aid for companies in the aviation industry and it should be emphasised that initiation of formal proceedings in a particular case should not be interpreted as an announcement of a negative decision to be given by the Commission. It is only another formal element of the procedure.

 

“We expected this decision to be published in the beginning of 2014. The Commission did not ask any additional questions in this document, as compared with its November announcement of opening the investigation. There is nothing new or surprising, because we are answering all questions from the Commission on a regular basis.” – says Sebastian Mikosz, CEO of LOT Polish Airlines. ÑThe only difference is that now a summary of our Plan was made public, which starts a kind of a public consultation. Our competitors will certainly not save us critics and will raise numerous doubts. It is not surprising, as we all operate on the highly competitive market. We can also expect not necessarily favourable analyses by experts who will in principle raise doubts to individual elements of the Plan. Since so many people have aggressively criticised the plan not knowing its details, one can imagine what will happen now. We are facing a difficult and intense period of giving explanations and answering questions, but I believe that we shall convince both the Commission and the public that LOT is an important participant of the market, and that Poland – in the interest of passengers not only from the country but also from the region should have a modern and efficiently managed carrier.” – adds Sebastian Mikosz.

The Restructuring Plan for LOT Polish Airlines was submitted to the European Commission on 20 June 2013. It is being consistently implemented and brings positive results.

LOT situation is consistently improving. Financial results are much better than expected.

Full data for the previous year will be available after the end of the first quarter of 2014.

It is estimated that 2013 will end with slight loss (about minus 20 million Zloty or less) as compared to the previously assumed minus 146 million. “These results confirm validity of the underlying principles and increase our reliability and credibility of our plan in the eyes of Brussels. It should be borne in mind that the document published by the Commission refers only to the Plan submitted in June, and not to all the progress in its implementation made since then. Consistently improving LOT situation is therefore the best ” test of life for our Plan” and I am confident that the Commission appreciates this fact.î – says Sebastian Mikosz, CEO of LOT Polish Airlines.

It is difficult to predict when the European Commission will close the state aid notification process for LOT Polish Airlines. As part of the formal investigation process, the EC shall endeavour to take a decision within 18 months from the initiation of the procedure.

The practice differs, largely depending on an individual case.

In December 2012, the Ministry of Treasury approved public aid for LOT. Under the first tranche (the so-called rescue aid) an amount of PLN 400 million was paid. A tranche for restructuring in the amount of PLN 381 million was planned to be paid in August 2013. However, thanks to the consistent efforts of the Company, its situation has gradually improved and – as a result – LOT will not apply for payment at least till the end of June 2014.

LOT Restructuring Plan envisages introduction of almost one hundred changes and initiatives, which – on the one hand – will reduce Company operating costs, while on the other hand will generate additional revenue. As a result of Plan implementation and introduction of a fleet of Boeing 787, LOT is to become one of the most cost-effective network carriers in Europe, restoring long-term viability as from 2015.

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