European Commission approves €650 million Polish support to LOT in context of coronavirus outbreak

The European Commission has approved two Polish measures, for a total of about €650 million (approximately PLN 2.9 billion), to support the airline LOT in the context of the coronavirus outbreak. The aid measures consists of a €400 million (approximately PLN 1.8 billion) subsidised loan and a capital injection of around €250 million (approximately PLN 1.1 billion). The measures were approved under the State aid Temporary Framework.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “LOT plays a key role for the connectivity and economy of Poland. With these measures, Poland will contribute approximately €650 million to help the airline weather the current coronavirus crisis. The decision ensures that the State is sufficiently remunerated for the risk taxpayers assume, and that the support comes with strings attached, including a dividend ban as well as further measures to limit distortions of competition. We continue working in close contact and cooperation with Member States, to find workable solutions to mitigate the economic impact of the coronavirus outbreak, in line with EU rules.”

The Polish measures

LOT is a major network airline in Poland and Central Europe and it is the only carrier operating a hub in Poland, at Warsaw Chopin airport.

In the second quarter of 2020, LOT suffered substantial losses due to the coronavirus outbreak and the travel restrictions that Poland and other countries had to impose to limit the spread of the coronavirus. The significant drop in travel demand and the restrictive measures continue deteriorating the financial situation of the airline. As a result, LOT is currently facing a risk of default and insolvency. The aid measures intend to restore LOT’s equity and liquidity position, in order to ensure the continuation of the air transport services in Poland that LOT provides.

Poland notified to the Commission, under the Temporary Framework, two measures in support of LOT:

a €400 million (approximately PLN 1.8 billion) subsidised loan; and
a capital injection of €250 million (approximately PLN 1.1 billion), through the subscription of newly issued shares taken up by Poland.
The Commission found that the measures notified by Poland are in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework. In particular:

The subsidised loan: will be granted before 30 June 2021 and will last for maximum six years. The loan will not exceed 25% of LOT’s turnover in 2019, and will cover investment and working capital needs of the company. The applicable interest rate will ensure minimum remuneration, in line with the conditions of the Temporary Framework.
The recapitalization aid:
Conditions on the necessity, appropriateness and size of the capital injection: the capital injection will not exceed the minimum needed to ensure the viability of LOT and will not go beyond restoring its capital position before the coronavirus.
Conditionson the State’s entry, remuneration and incentives to exit from the capital of the company: the recapitalisation aid will prevent an insolvency of LOT, which would have serious consequences on Polish employment, connectivity and foreign trade. Poland will receive an appropriate remuneration for the investment, and there are additional mechanisms to incentivise LOT to redeem the State’s equity participation obtained as a result of the recapitalisation. Poland submitted a business plan prepared by LOT to redeem the recapitalisation instruments. Poland also committed to prepare an exit strategy within 12 months after the granting of the aid, unless the State’s intervention is reduced below the level of 25% of equity by then. If seven years after receiving the recapitalisation aid the State’s intervention is not reduced below 15% of LOT’s overall equity, a restructuring plan for LOT will be notified to the Commission.
Conditions regarding governance: until the State has exited in full, LOT and its subsidiaries will be subject to bans on dividends and share buybacks other than in relation to the State. Moreover, until at least 75% of the recapitalisation is redeemed, a strict limitation of the remuneration of the management of LOT and its subsidiaries, including a ban on bonus payments, will apply. These conditions aim at incentivising an exit of the State as soon as the economic situation allows.
Prohibition of cross-subsidisation and acquisition ban: to ensure that LOT does not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, it cannot use the aid to support economic activities of integrated companies that were in economic difficulties already on 31 December 2019. Moreover, until at least 75% of the recapitalisation is redeemed, LOT and all companies controlled by LOT will be prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
Public transparency and reporting: LOT will have to publish information on the use of the aid received, including on how its use supports the company’s activities in line with EU and national obligations linked to the green and digital transformations.
The Commission concluded that the measures aim at restoring the balance sheet position and liquidity of LOT in the exceptional situation caused by the coronavirus pandemic. Since the recapitalization does not exceed €250 million, no further commitments to ensure effective competition are required. The measures are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework.

On this basis, the Commission approved the measures under EU State aid rules.