Commission Decision (EU) 2023/1229 of 7 June 2022 on the State aid SA.58101 (2020/C ex 2020/N) and SA.62043 (2021/C ex 2021/N) which Portugal is planning to implement for rescuing and restructuring the SATA Group (notified under document C(2022) 3816)Text with EEA relevance.

(108) Portugal explains that Azores Airlines also suffered losses on the Azores-North America routes it served and that such losses should also be compensated. In particular, the operational deficit for Azores-North America routes between 2009 and 2019 is estimated at EUR 47,2 million. Portugal claims that those routes are de facto SGEI, as operated in the public interest, and that consequently the compensation of this deficit should be considered compatible under Commission Decision 2012/21/EU

Commission Decision of 20 December on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (OJ L 7, 11.1.2012, p. 3).

, as annual traffic does not exceed 300000 passengers.

(109) On 10 June 2021, Portugal submitted further comments on: (i) the entrustment of the PSOs to SATA and Azores Airlines, as well as the SGEI to SGA; (ii) the proportionality of the aid and its limitation to the minimum; (iii) measures to limit distortions of competition, and (iv) compliance with the one time, last time principle.

(110) The arguments relating to the necessity of the PSOs and SGEIs entrusted to SATA in view of the specific socio-economical needs of the outermost region of Azores largely correspond to what was already stated in the previous communications from Portugal (recitals 64 to 66). With regards to the proportionality of the aid, Portugal reiterates that any burden sharing by subordinate creditors, such as bond holders, would harm market confidence and hinder the future funding prospects of SATA. In addition, according to Portugal, this would entail potential spill over effects to the regional administration and other companies of the regional public sector, given that the majority of SATA financial debt is guaranteed by the ARA.

(111) Notwithstanding the above, Portugal has phased out the repayment of the […] of EUR […] million ( […] ), during the restructuring period, while committing itself to the highest possible level of debt write-off (recitals 49 to 50). Portugal also reiterates its arguments pertaining to the negative consequences of any burden sharing imposed on subordinate creditors, such as bond holders, as this would harm market confidence and hinder the future funding prospects of SATA and alleges potential spill over effects to the regional administration and other companies of the regional public sector, given that the majority of SATA financial debt is guaranteed by the Region.

(112) As SATA is a wholly owned regional public undertaking, Portugal insists that the only resources that it is able to provide as own contribution are cost or debt reductions and sale of assets. In order to demonstrate that SATA’s contributions are real and accurate, in its communication of 2 December 2021 Portugal submits evidence of agreements and negotiations relating to the cost reductions of the restructuring plan for around EUR […] million (recital 49).

(113) With regard to the planned sale of 51 % of Azores Airlines and the ground-handling business, Portugal commits itself to implementing the divestiture by the end of 2025

Portugal’s submission of 18 February 2022, p. 3.

, and to presenting a comprehensive step plan for the privatisation, detailing the commitment of the ARA.

(114) According to Portugal (recital 51), […], the overall own contribution would be around […] %, which would represent a significant rate, considering the size and characteristics of SATA and the socio-economic conditions of Azores as an outermost region of the Union, as well as an assisted area under Article 107(3), point (a), TFEU

See footnote 69.

.

(115) In terms of measures to limit distortions of competition, in its submission of 10 June 2021 Portugal clarifies that the sale of a stake equal to at least 51 % of the shareholding in Azores Airlines will result in a loss of control of the subsidiary by SATA Air Açores and, ultimately, the Region of Azores. In addition, the Portuguese authorities agree to implement the necessary terms and conditions of corporate governance which ensure that […]

Portugal’s submission of 10 June 2021, point 76.

.

(116) As for the compliance with the one time, last time principle, on 1 June 2021 Portugal submitted evidence that SATA had reimbursed the capital increases subscribed by the ARA since 2017, in three instalments totalling EUR 72,6 million: EUR 24000000 on 16 March 2021, EUR 27000000, on 17 March 2021 and EUR 21580735, on 26 May 2021. SATA has also proceeded with the corresponding reduction of its share capital, executed and registered in the Portuguese Commercial Registry. On 30 November 2021, Portugal confirmed it had recovered interest amounting to EUR 815233,24 in conformity with Chapter V of Regulation (EC) No 794/2004.

4.2.

Comments on third party observations

4.2.1.

Portugal’s comments on Ryanair’s observations

(117) As a preliminary point, the Portuguese authorities stress the importance of preserving the confidentiality of information regarding public regional companies and set aside Ryanair’s complaints concerning the lack of transparency. Portugal submits that the information that is required to be publicly available (financial statements and annual reports) concerning SATA is easily accessible. It also refers to documentation and reports, such as the one of the Portuguese Court of Auditors

Portuguese Court of Auditors’ Report and Opinion on the 2020 ARA accounts https://www.tcontas.pt/pt-pt/ProdutosTC/PareceresTribunalContas/pareceres-craa/Documents/2020/sratc-cra-2020.pdf .

or the one prepared by the Regional Parliament of Azores

SATA Management Report for 2020, https://portal.azores.gov.pt/documents/36626/729805/SATA+GA+RC+2020.pdf/98844e5b-93c0-709c-3a13-e9cadaf5e6d4?t=1627401511597 .

, that are public and can be found easily. By contrast, the information to which Ryanair claims to have no access is precisely the information that the Commission has requested Portugal to provide under the investigation procedure opened to assess the past capital increases.

(118) Concerning the alleged unavailability of information in the decision regarding compensation of PSOs, Portugal explains that, as the Commission opened an investigation procedure concerning the past capital increases, it was not for the Commission to provide information supporting the possibility of those increases having been directed at remedying insufficient compensation for the provision of PSOs. On the contrary, Portugal underlines that it is for the Portuguese authorities to invoke possible grounds of compatibility of the past capital increases and to demonstrate that the conditions for such compatibility are met, as confirmed by the case-law of the Court of Justice of the European Union

Judgment of the Court of Justice of 28 April 1993, ltaly v Commission, C-364/90, ECLI:EU:C:1993:157, paragraph 20.

.

(119) Likewise, concerning the alleged excessive confidentiality of the extension decision, Portugal replies that the right not to have business secrets and confidential information made public and the duty of the Commission under the terms of Article 287 TFEU should not be endangered by the procedural rights of interested parties, such as Ryanair, to submit comments on procedures under Article 108(2) TFEU. At any rate, Portugal points to the clarity of the extension decision in detailing the sources of SATA’s own contribution - which are explained, in addition to recital 23, mentioned by Ryanair, in recital 21 and are then assessed in recitals 71 and 74 - whereas the measures to limit distortions of competition are analysed in recitals 83 to 89 of the said decision

Portugal’s observations to the comments of interested parties of 12.8.2021, pts. 14-19.

.

(120) As regards the past capital increases, in response to Ryanair’s complaint that those increases did not comply with the market economy investor test, the Portuguese authorities submit that Ryanair does not explain why such test should be applicable to the case at hand, or why its application would result in a finding of existence of State aid. Portugal submits that, as established by a settled case-law, the market economy investor test should not be applicable and adequate for the assessment of the existence of State aid in light of the activities of SATA. Indeed, SATA does not operate under normal market conditions given that it is entrusted with the provision of SGEIs and PSOs that pursue the Region’s policy of ensuring appropriate territorial continuity of Azores with mainland Portugal and with the Azorean diaspora in North America.

(121) Portugal also rejects Ryanair’s claim concerning the possibility of invoking the COVID-19 pandemic as a circumstance justifying a departure from the one time, last time principle. Portugal submits that SATA’s activities never fully stopped during the travel restrictions, as SATA carried out an essential role. After those activities were resumed, SATA continued to be affected by the COVID-19 pandemic in a manner different from a normal airline, given that SATA serves PSO routes to ensure territorial connectivity, which it cannot cease or reduce without putting those PSOs at risk, whether they are profitable or not.

(122) Portugal highlights that the entry of a new competitor would not guarantee the frequency or the continuity of routes and would not be in line with the relevant PSO requirements and connectivity needs of the Azores Region. In particular, calculating the market share of each company for each international direct route to / from the Azores in 2019, Ryanair has a total of 9,8 %, whilst Azores Airlines has 75 %: given the relevant difference in their respective presence, it would be unlikely even for Ryanair to replace it in the Azorean routes in the short-medium term. In that regard, the exit of SATA from the market would be highly detrimental to this outermost region. As for the connections within the archipelago, the fact that SATA Air Açores has always been the only airline to participate in the public tenders launched since 2002, including the most recent one launched on 4 June 2021 for the awards of inter-island PSO routes, demonstrates, in Portugal’s view, the lack of interest of other airlines to operate on this market. Likewise, SATA is the only air carrier that has submitted operations plans to ANAC to operate PSO routes connecting the Azores with mainland Portugal and with the Madeira, even if, regarding such PSO routes, Portugal clarifies that they are not subject to a public tender, but to a less stringent procedure. Portugal stresses that this lack of interest in PSO routes has continued despite the overcapacity that, as Ryanair claims, the pandemic has created. Moreover, Portugal remarks that airlines that entered the liberalised routes where SATA operated exited very shortly thereafter, especially because of the particular and atypical operational conditions

Portugal’s submission of 13 August 2020, Annex 6 - Competitive landscape in aviation in the Azorean market, indicating that Air Berlin, Air Europa, Delta, Easy Jet, Flylal, Germania, JetTime, Niki, Norwegian, Primera, Travel Service and TUI NL (all carriers marked with provided charter flights) have interrupted routes to the Azores since 2016.

.

(123) To characterise the specificity of the Azores market, Portugal submits that the situation of SATA cannot be compared to the one of Spanair or Malév, unlike Ryanair argues. Indeed, those bankrupted companies operated on attractive commercial markets different from the Azores routes from a geographical, social and economic perspective. The exit from the market of SATA would not incentivise competition, in Portugal’s view, for the following two reasons: (i) the decrease in the level of demand due to the COVID-19 pandemic and the necessary territorial continuity in the Region, which involves the impossibility to stop flying; and (ii), in the cases of Spanair and Malév, the increase in the demand, following the exit from the market of the two mentioned airlines, was the result of external factors and not of more efficient airlines.

(124) In respect of the proposed discontinuance of non PSO/SGEI routes, Portugal alleges that, contrary to Ryanair’s claim that it would be able to substitute Azores Airlines on its commercial routes to the mainland, Ryanair has kept a limited number of frequencies on its routes since the liberalisation of the connections between São Miguel and Terceira to Lisbon and Oporto, in 2015, and has not increased such frequencies when those of SATA were reduced, e.g. in February and March 2021

Annex 1 to Portugal’s submission of 12 August 2021.

. Furthermore, Ryanair does not provide air transport services to North America to ensure connectivity with the Azorean diaspora, nor air cargo services to export and supply goods to ARA. Both services are fundamental for the Azores, the first activity to bring foreign investment and tourism, the second to support the local economy: in 2019, nearly [55-65] % of the air cargo to/from Azores (approximately […] thousand tonnes) was ensured by Azores Airlines, including fresh fish (approximately [55-65] % of the total Azores Airlines cargo), mail (approximately [5-15] %) and medical supplies (approximately [0-5] %).

(125) Similarly, Portugal rejects Ryanair’s interpretation that the COVID-19 pandemic cannot qualify as an exceptional and unforeseen circumstance by referring to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak

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 Commission Communications C(2020) 2215 (OJ C 122I, 4.4.2020, p. 1), C(2020) 3156 (OJ C 164, 13.5.2020, p. 3), C(2020) 4509 (OJ C 218, 2.7.2020, p. 3), C(2020) 7127 (OJ C 340I, 13.10.2020, p. 1), C(2021) 564 (OJ C 34, 1.2.2021, p. 6), and C(2021) 8442 (OJ C 473, 24.11.2021, p. 1) (the Temporary Framework).

adopted by the Commission.

(126) Finally, Portugal argues that the allocation of PSO routes to SATA has been done in compliance with the rules and procedures laid down in Regulation (EC) No 1008/2008 and confirms the Commission decision with regard to the description of Ryanair’s routes between the Azores and the rest of the Union, as well as direct routes to and from the Azores operated by TAP.

4.2.2.

Portugal’s comments on PPM’s observations

(127) On PPM’s allegation concerning the inaccuracy of some information provided by the Portuguese authorities that would result in an attempt to mix the activities of SATA Air Açores and Azores Airlines, Portugal considers that, in view of the opening decision, as well as the further explanations submitted to the Commission, there is no possible confusion between those companies.

(128) Portugal claims that PPM’s comments contain several unsubstantiated and/or untrue allegations. First, the list of competitors of Azores Airlines provided by PPM is inaccurate, because only TAP and Ryanair compete with SATA in the same markets, whereas the regular routes operated by Azores Airlines are different from those operated by White, Euroatlantic, Cabo Verde Airlines and Binter. Those airlines, indeed, do not operate regular routes from the Azores. As for Binter, the airline operates a route within the Madeira archipelago which was previously operated by SATA Air Azores under a public contract for the period from 2011 to 2013. As for EasyJet, it only competed with Azores Airlines on the liberalised routes between the Azores and the mainland of Portugal until it exited those routes in 2017. In total, 12 air carriers have tried to operate in the Azorean market, but had to abandon it since 2016 due to the lack of profitability

See footnote 117.

. Also the connections with the USA and Canada that are of crucial importance for the Region have generally been assured by Azores Airlines. In particular, according to Portugal’s submission, only Delta operated the route from Ponta Delgada to New-York, from May 2018 to September 2019, and TAP’s direct route between Ponta Delgada to Boston, launched in July 2020, has been discontinued.

(129) Contrary to the PPM’s allegations that the PSO routes have only been explored – on a voluntary basis - by Azores Airlines and that the losses would be explained by Portugal’s non-compliance with Regulation (EC) No 1008/2008, Portugal replies that the routes between the Azores and mainland Portugal have been considered as PSO routes since 1998 and that information notices and further amendments have always been published in the Official Journal of the European Union from 1998 until 2015. In the period between 2005 and 2015, however, a public tender was not needed, as the routes were operated without a concession contract or corresponding compensation: in particular, TAP and Azores Airlines were operating Lisbon-Horta, TAP was the only carrier operating Lisbon-Pico, whereas Azores Airlines was the only one operating Lisbon-Santa Maria. As of March 2015, those routes had evolved due to the liberalisation of some of them, whilst the main conditions attached to service provisions were also modified. Portugal concludes that the establishment of the PSO routes and their attribution have always been in compliance with the procedure laid down in Regulation (EC) No 1008/2008 and, as described in its submissions, from March 2015 onwards Azores Airlines was the only air carrier that demonstrated interest in operating the (open) PSO routes and that submitted operations plans to ANAC. Portugal, thus, underlines that the operation of those routes has not been done on the basis of their profitability. Portugal also states that the allegations of overload and complexity of the PSO and tender rules have no basis, as (i) they followed the general pattern for this type of tenders, (ii) were communicated to the Commission and approved as per the procedure laid down in Regulation (EC) No 1008/2008. Likewise, Portugal rebuts the allegation by PPM that the tender for the inter-island routes is for all the routes as a group by recalling that such a possibility is expressly provided for by Regulation (EC) No 1008/2008, as the wording of Article 16(10) of that Regulation clearly applies to the Azores’s specific situation in Portugal’s view. Finally, in what concerns PPM’s argument that the financial compensation paid to SATA Air Açores for the PSOs also constitute an unlawful subsidisation of Azores Airlines, Portugal explains that the paid amounts not only do not allow for any transfer to Azores Airlines, but actually do not cover the deficits generated by the operations of such routes

Portugal’s submission of 13 November 2020, p. 9.

.

4.2.3.

Portugal’s comments on other parties’ observations

(130) On the one hand, Portugal highlights the positive remarks made in relation to the essential role played by SATA for the socio-economic development of the Azores and in ensuring national and international territorial continuity of the Azores with the Union. Portugal also remarks that those comments emphasise the compatibility of the past capital increases with Union rules, those increases having a negligible impact on competition and in the internal market, given the necessity to ensure the connectivity of the Azores diaspora. Furthermore, some comments also outline the specificity of SATA on the routes that SATA Air Açores and Azores Airlines operate, given that SATA’s model would not be replicated by its competitors, which could ultimately be highly detrimental to the Azorean immigrant community.

(131) On the other hand, to further underline SATA’s essential role Portugal observes that some comments insist on the remoteness of the Region of Azores and its lack of connection to the internal market, which might discourage trade and be an impediment to the free movement of goods. Portugal also submits that third parties such as AJFA, SDABS, and Brampton Travel AG (BTA) highlight the relevance of the North American routes for business and investment purposes. From an economic perspective, Portugal emphasises that third parties stress the relevance of SATA to the tourism sector, which is key for the development of the Region. SATA secures the access to essential and non-essential goods from the outside that are necessary for the development of the tourism sector. SATA’s unmeasurable role in the whole tourism value chain is outlined by the APAVT (and by the ATA).

(132) The Portuguese authorities also submit that comments, in particular those made by the Azorean Agricultural Federation and the Azorean Fishing Federation for the fishing and agricultural sectors, have emphasised the distinctive role played by SATA for the producers of the Region to ensure access to equal opportunities (by securing the distribution and export of products between islands, the mainland of Portugal, and other territories).

(133) Finally, Portugal highlights that, beyond the support provided by SATA’s air services to the social and economic development of the local community, without which recovery of the Region from the current pandemic would be virtually impossible, certain third parties that submitted observations in the context of the Commission’s investigation procedure, such as the Association of Municipalities of the Azores Region, have underlined that SATA has an essential role in the specific and exceptional circumstances provoked by the COVID-19 pandemic, inter alia, for the transport of medical equipment to the Region.

1. ASSESSMENT OF THE MEASURES

(134) The Commission will first assess whether the restructuring aid, namely the Regional Government’s direct loan of EUR 144,5 million and the debt assumption of EUR 173,75 million, totalling EUR 318,25 million to be converted into equity, as well as the State guarantee of EUR 135 million to be granted until 2028 on loans from banks and/or other financial institutions, entail State aid within the meaning of Article 107(1) TFEU, and, if so, whether such aid is lawful and compatible with the internal market.

(135) The same assessment will also be carried out with respect to the past capital increases, as the formal investigation procedure initiated in the opening decision also concerns those measures

Opening decision, recitals 52, 55, 58-59, 91 and 112.

. That assessment is carried out in recitals 242 to 248.

(136) By contrast, such assessment will not be carried out with respect to the rescue aid to SATA notified on 13 August 2020 (recital 1), given that the notification in question was later withdrawn on 6 April 2022 and that the rescue aid had not been put into effect (recital 12). While the rescue aid as such has not been granted to SATA, the Commission notes that, in reaction to Portugal’s notification of rescue aid, the opening decision approved liquidity support to SATA under point 103 of the R&R Guidelines to ensure the continuity of the SGEI in the air transport services and airport management services provided by SATA during the formal investigation into the rescue aid. That support was subsequently extended to EUR 255,5 million and prolonged, as approved in the extension decision (recital 7) and in the Commission decision of 5 November 2021 (recital 11). While the support was initially granted in the form of guarantees on loans, in the latter decision the Commission approved a replacement, by Portugal, of the public guarantees by shareholder’s direct loans to SATA, in particular with regards to an amount of EUR 82,5 million that ARA could not roll over to the 2022 budget. Nonetheless, the compatibility of that support has already been assessed in the decisions referred to in recitals 2, 7 and 11 in accordance with point 103 of the R&R Guidelines and is independent from the compatibility of the rescue aid as such. Therefore, the rescue aid as such has not been put into effect and, as a result of the withdrawal of the notification concerning that aid, the Commission is no longer called upon to examine the compatibility of such rescue aid.

5.1.

Existence of State aid

(137) According to Article 107(1) TFEU, [s]ave as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

(138) The qualification of a measure as State aid within the meaning of that provision therefore requires the following cumulative conditions to be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and affect trade between Member States. It is therefore appropriate to examine separately whether the measures qualify as State aid.

5.1.1.

State resources and imputability to the State

(139) The measures involve administrative acts and public decisions.

(140) The restructuring aid is funded through public resources coming from the budget of the Region of Azores. In particular, the Region of Azores, as sole shareholder of SATA, will provide from resources of its budget: (i) the necessary capital injections of EUR 144,5 million to increase SATA’s depleted equity; (ii) the funds to finance the debt assumption in the amount of EUR 173,75 million, also to be converted into capital; and (iii) the guarantee until 2028 in the amount of EUR 135 million on loans from banks and/or other financial entities. As regards the past capital increases, as the Commission found in recital 39 of the opening decision, the Region of Azores subscribed to those increases (now reimbursed with interest) using resources from its budget and based on decisions taken by the Council of the Region’s Government (recitals 102-103).

(141) Under Article 107(1) TFEU resources of local authorities, such as a region, are State resources and decisions adopted by such authorities are regarded as imputable to the State. Hence, the above measures are imputable to the State and financed through State resources.

(142) The Commission, therefore, concludes that the above described measures involve State resources and the decisions to grant them are imputable to the State.

5.1.2.

Advantage

(143) An advantage, within the meaning of Article 107(1) TFEU, is any economic benefit which an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention

Judgment of the Court of Justice of 11 July 1996, SFEI and Others, C-39/94, ECLI:EU:C:1996:285, paragraph 60; judgment of the Court of Justice of 29 April 1999, Spain v Commission, C-342/96, ECLI:EU:C:1999:210, paragraph 41.

.

(144) As regards the restructuring aid to SATA, both the shareholder’s loans and debt assumption to be converted into capital and the guarantee on loans provided by the Region of Azores confer an economic advantage on the beneficiary, given that, in the specific situation and in current circumstances, SATA cannot obtain capital or raise debt finance at market conditions without a public guarantee (as acknowledged by Portugal, recital 67). Indeed, without intervention by the State, SATA will almost certainly go out of business in the short term, as no private investor seems ready to inject capital nor is any financial institution willing to offer fresh finance. The restructuring aid is not necessary to preserve or increase the value of the shareholding of the ARA. On the contrary, the funding does not appear capable of providing a shareholder return commensurate with the risk taken. Portugal does not claim that such return would actually be achieved. Indeed, the available evidence shows that, whilst being capable of providing an adequate return and remunerating the State at the end of the restructuring plan (Table 1.A and recitals 206 et seq.), the losses of the first four years of the restructuring period are much higher than positive earnings at the end of the restructuring. Therefore, during the five-year restructuring period, the cumulated revenues expected remain well below the opportunity cost of equity (16 % as per recital 206).

(145) With regard to the past capital increases, the Commission upholds the position expressed in the opening decision

Opening decision, recitals 44 to 48.

. Portugal explains that those measures were in part taken to ensure compliance with the provision of national law that requires shareholders to deliberate on a capital injection in case of a loss of paid-in share capital as a result of accumulated losses (recital 102), but that does not explain why the Region chose to provide further capital to SATA rather than, for instance, placing it in liquidation or in insolvency. Portugal does not purport that those measures were underpinned with any forecasts that would convince a market economy shareholder to increase its investment in a company with a view to achieving a market-conform return on the investment. Nor is there allegations or evidence adduced in the proceedings by Portugal or by parties showing that the recapitalisation of SATA as from 2017 was premised on or supporting an operational and financial business plan aimed at improving the efficiency of operation and eventually the profitability of the Region’s shareholding in SATA. On the contrary, Portugal claims that those capital increases amounted to compensation of the operational deficits stemming from the operation of PSOs and of a de facto SGEI concerning SATA’s flights to North America (recitals 102 to 108). The Commission therefore maintains that in putting those measures into effect, the Region did not act in its capacity of a shareholder (or investor), but as a public authority.

(146) In any event, the Commission notes that Portugal has not mentioned that the above decisions were taken on the basis of economic evaluations comparable to those which, in similar circumstances, a rational market economy operator with characteristics similar to those of the Portuguese authorities would have had carried out to determine the profitability or economic advantages of the measures, before deciding on the purported investment.

(147) The Commission therefore concludes that the measures provide SATA with funding that the beneficiary cannot and could not obtain on the market, thereby conferring an economic advantage to SATA within the meaning of Article 107(1) TFEU.

5.1.3.

Selectivity

(148) The measures benefit SATA only, through the exercise of discretion for an ad hoc amount determined by reference to the specific needs of the beneficiary (recitals 43 to 51). As the Court has stated

Judgment of the Court of Justice of 4 June 2015, Commission v MOL, C-15/14 P, ECLI:EU:C:2015:362, paragraph 60.

, where individual aid is at issue, the identification of the economic advantage is, in principle, sufficient to support the presumption that a measure is selective. This is so regardless of whether there are operators on the relevant markets that are in a comparable factual or legal situation.

(149) Whilst Portugal has provided or may still provide State aid to other airlines competing with SATA, in any event, the capital injection and guarantees on loans are not part of a broader measure of general economic policy to provide the same type of ad hoc support to undertakings, which are in a comparable legal and factual situation in light of the objective of the measures, active in the aviation sector or other economic sectors, but are made available only to SATA.

(150) Therefore, the Commission concludes that the measures are selective within the meaning of Article 107(1) TFEU.

5.1.4.

Distortion of competition and effect on trade

(151) When aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intra-Union trade, such undertaking must be regarded as affected by that aid. It is sufficient that the recipient of the aid competes with other undertakings on markets open to competition. In that regard, the fact that an economic sector has been liberalised at Union level is an element that may serve to determine that the aid has a real or potential effect on competition and on trade between Member States.

(152) SATA is a regional airline that provides air transport services on routes connecting the islands of the Azores archipelago, as well as connecting those islands to the mainland, Madeira and a number of North American destinations (Boston, Oakland, Toronto and Montreal), where the local Portuguese diaspora is settled. Even if the aid recipient is not directly involved in cross-border trade within the Union, given that the aviation sector is open to competition in the Union and other carriers could provide those routes in competition with SATA, the notified measures are liable to improve the position of the beneficiary in relation to actual competing undertakings or potential ones that do not have access to similar State support from Portugal or that have to finance operations at market conditions.

(153) The measures are consequently liable to distort or threaten to distort competition and to affect trade between Member States.

5.2.

Conclusion on the existence of State aid

(154) In view of the above, the Commission concludes that the restructuring aid and the past capital increases in favour of SATA constitute State aid within the meaning of Article 107(1) TFEU.

5.3.

Lawfulness of the measures

(155) The Commission considers that by notifying and refraining from implementing the restructuring aid prior to its approval by the Commission, Portugal has complied with its obligations under Article 108(3) TFEU.

(156) The rescue aid notified on 13 August 2020 was not put into effect prior to the withdrawal of that notification (recital 12). By contrast, the past capital increases were granted without prior notification and were only reimbursed with interest upon the initiation of the formal investigation procedure.

5.4.

Compatibility with the internal market

(157) Article 107(3), point (c) TFEU provides that aid to facilitate the development of certain economic activities or certain areas may be considered compatible with the internal market where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(158) Hence, in order for the aid to be declared compatible, on the one hand, it must be aimed at facilitating the development of certain economic activities or of certain economic areas and, on the other hand, it must not adversely affect trading conditions to an extent contrary to the common interest. Under the second condition, in particular, the Commission balances the positive effects of the proposed aid for the development of the activities, which the aid is intended to support, against the negative effects that the aid may have on the internal market

Judgment of the Court of Justice of 22 September 2020, Austria v Commission, C-594/18 P, ECLI:EU:C:2020:742, paragraph 19.

.

(159) Portugal considers that the restructuring aid can be declared compatible with the internal market pursuant to the R&R Guidelines.

(160) In view of the nature and aims of the State aid at stake and the claims of the Portuguese authorities, the Commission will assess whether the restructuring aid complies with the relevant provisions laid down in the R&R Guidelines. In the R&R Guidelines, the Commission set out the criteria which it examines when assessing the compatibility of a company’s restructuring aid with the internal market pursuant to Article 107(3), point (c) TFEU

R&R Guidelines, point 38.

.

(161) In examining whether restructuring aid has an adverse effect on trading conditions to an extent that is contrary to the common interest, the Commission carries out a balancing test according to Article 107(3), point (c) TFEU and the R&R Guidelines. In that test, provided that the beneficiary is eligible to receive restructuring aid, the Commission weighs the positive effects of the aid for the development of the activities that the aid is intended to support against the negative effects created by the impact of the State aid on competition and trade between Member States, assessing in particular how the aid measure minimises the distortions on competition and trade (need for State intervention, appropriateness, proportionality, transparency of the aid, one time, last time principle and measures to limit distortions of competition).

(162) The above is without prejudice to the fact that decisions adopted by the Commission on that basis must ensure compliance with Union law

Judgment of the Court of Justice of 22 September 2020, Austria v Commission, C-594/18 P, ECLI:EU:C:2020:742, paragraphs 18 to 20.

.

(163) In the light of the notification and the information collected in the course of the formal investigation into the restructuring aid, it does not result that the restructuring aid nor the conditions attached to it, or the economic activities facilitated by the aid, could entail a violation of a relevant provision of Union law. In particular, as evidenced by Portugal, the 14 routes connecting the nine islands of the Region through inter-island air transport of the Azores archipelago were entrusted exclusively to SATA Air Açores to be operated under PSOs in accordance with Regulation (EC) No 1008/2008 (Section 2.1.1, recitals 18 and 19). Likewise, the four routes between the Azores and mainland Portugal and Madeira, considered as PSO routes since 1998, have been operated as open PSOs by Azores Airlines following information notices published in the Official Journal of the European Union from 1998 until 2015 in compliance with the same relevant Union rules (recital 20). As from March 2015, the routes under PSOs have changed due to the liberalisation of some of them, whilst Azores Airlines was again the only air carrier that demonstrated interest in operating those PSO routes, without exclusivity and without compensation, and that submitted operations plans to ANAC (recital 107). Moreover, the Commission has not sent a reasoned opinion to Portugal on a possible infringement of Union law that would bear a relation to this case, nor has it received any complaints that might suggest that the State aid, the conditions attached to it or the economic activities facilitated by the aid might be contrary to relevant provisions of Union law, other than Article 107 and 108 TFEU.

(164) In respect of the PSO and SGEI operations, the Commission also notes that doubts raised as to whether they would be defined, imposed and entrusted in compliance with the relevant Union law for the duration of implementation of the restructuring plan

Extension decision, recital 59.

have been allayed by the information provided by Portugal on the renewal of the five years PSC for the intra-islands routes, as well as on a future tender for the routes to mainland and Madeira that should be organised within the time-line of the restructuring plan, while the SGEIs are entrusted by way of a concession awarded to SGA until the end of the restructuring period in 2025 (recitals 19 to 23).

5.4.1.

Eligibility: undertaking in difficulty

(165) In order to be eligible for restructuring aid, a beneficiary must qualify as an undertaking in difficulty within the meaning of section 2.2 of the R&R Guidelines. In particular, point 20 of the R&R Guidelines explains that an undertaking is considered to be in difficulty when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term. This would be the case when at least one of the circumstances described in letters (a) to (d) of point 20 of the R&R Guidelines occurs.

(166) As described in recitals 14, 30 and 31, SATA is a limited liability company that presented a negative total equity amount of EUR -369,3 million at the end of 2020, which shows that all of its subscribed share capital had disappeared. The latest available audited reports and projections […], so that […] it continues to be an undertaking in difficulty as defined in point 20(a) of the R&R Guidelines.

(167) According to point 21 of the R&R Guidelines, a newly created undertaking in operation for less than three years is not eligible for rescue or restructuring aid. The beneficiary is not a newly created undertaking, since it was established in 1941, so more than three years ago (recital 14).

(168) According to point 22 of the R&R Guidelines, a company belonging to or being taken over by a larger business group is not normally eligible for restructuring aid. The beneficiary is fully and individually owned by the ARA and is, therefore, not part of a larger business group (recital 14).

(169) On the basis of the above, the Commission concludes that SATA is an undertaking in difficulty and is eligible for restructuring aid.

5.4.2.

The aid facilitates the development of an economic activity or a geographic area

(170) Under Article 107(3), point (c), TFEU, State aid, to be considered compatible with the internal market, must facilitate the development of certain economic activities or certain economic areas.

(171) In that regard, to show that restructuring aid is intended to facilitate the development of such activities or areas, the Member State granting such aid must demonstrate that the aid aims to prevent social hardship or address a market failure. In the specific context of restructuring aid, the Commission notes that, as acknowledged at point 43 of the R&R Guidelines, in fact, market exit is important to the wider process of productivity growth, thus merely preventing an undertaking from exiting the market does not sufficiently justify State aid. On the contrary, rescue and restructuring aid are among the most distortive types of State aid, as they interfere with the process of market exit. However, in certain situations, restructuring an undertaking in difficulty may contribute to the development of economic activities or areas, also beyond the very activities carried out by the beneficiary. This is the case where, in the absence of such aid, the beneficiary’s failure would lead to situations of market failure or social hardship, inhibiting the development of the economic activities and/or areas that would be affected by such situations. A non-exhaustive list of such situations is laid down at point 44 of the R&R Guidelines.

(172) Such situations occur, inter alia, where the aid avoids the risk of interruption to the continuity of provision of an SGEI, or of an important service, hard to replicate and where it would be difficult for any competitor simply to step in, or where the beneficiary plays an important systemic role in a region or sector from which its exit would have potential negative consequences

Point 44 (b), (c) and (d) of the R&R Guidelines.

. By enabling the beneficiary to continue its operations, the aid thus prevents such market failure or social hardship. In the case of restructuring aid, however, this is only true where the aid enables the beneficiary to compete in the marketplace on its own merits, which can only be ensured if the aid is premised on the implementation of a restructuring plan that restores the beneficiary’s long-term viability.

(173) The Commission, hence, will first assess whether the aid is intended to prevent a situation of market failure or social hardship (section 5.4.2.1) and whether it is accompanied by a restructuring plan restoring the beneficiary’s long-term viability (section 5.4.2.2).

5.4.2.1.

Contributing to the development of economic activity by prevention of social hardship or market failure

(174) Among the situations where rescuing or restructuring an undertaking in difficulty may contribute to the development of economic activities or areas, point 44(b), (c) and (d) of the R&R Guidelines mention cases where aid is intended to avert the risk of economic growth being hampered by the disruption of an important service as a consequence of the exit of the beneficiary from the market (point 44(b) of the R&R Guidelines), or through the failure of an undertaking with an important systemic role in the sector or region concerned (point 44(c) of the R&R Guidelines), or the risk of interrupting the continuity of an SGEI (point 44(d) of the R&R Guidelines).

The aid avoids the disruption of an important service

(175) In the extension decision

Extension decision, recitals 57-58, referring to the assessment expressed in recitals 69-71 of the opening decision.

, the Commission considered that the restructuring aid to SATA averted the disruption of an important service which was hard to replicate and where it would be difficult for competitors to simply step in (in accordance with point 44(b) of the R&R Guidelines).

(176) In particular, the Commission noted that the liquidity and restructuring measures aim at preventing a situation in which SATA goes out of business due to the difficulties that it has been experiencing in the last years, which were acutely aggravated by the COVID-19 pandemic, and that, based on the information available, no other carrier has demonstrated commercial interest in alternative or complementary routes, so that the aid is essential to avert a serious and imminent risk of disruption to the services provided by SATA

Extension decision, recital 58.

. Since an airline needs to possess sufficient liquidity to maintain its operating licence, in light of the available evidence and the recent and expected operating losses for each of the SATA airlines (Table 1.A) it is clear that in the absence of the restructuring aid,

SATA would be unable to meet its payment obligations and liabilities and, thus, would need to file for insolvency and discontinue its activity (recital 64). As the beneficiary provides passenger and cargo air transport services and manages small airports (recitals from 17 to 23), without State intervention there is a serious risk of disruption to essential services, without which the connectivity and territorial continuity of the Azores archipelago and the Union would be curtailed. Such connectivity is even more important in view of the fact that the Region of the Azores is an outermost region of the Union and, as such, has permanent weaknesses, including the above-mentioned distance from the European continent, as recognised by Article 349 TFEU, which harms its economic and social development.

(177) The preliminary findings of the Commission in the opening and extension decisions are contested by Ryanair. Furthermore, Ryanair argues that the overcapacity caused by the COVID-19 pandemic allows more efficient competitors to step in and replicate the role of SATA Air Açores and Azores Airlines. Specifically, Ryanair claims that it would be able to take over all of SATA Air Açores and Azores Airlines’ routes to the mainland in a matter of days.

(178) The Commission considers that Ryanair’s allegations are unfounded in light of the submissions of third parties and of the information submitted and the commitments undertaken by Portugal. Contrary to what Ryanair states in its observations, there is no evidence – either as supporting information or by way of a market study – of a potential replacement of the role of SATA in the Azores archipelago by the continuing overcapacity generated by the COVID-19 pandemic. In particular, Ryanair did not increase its connections with Azores when SATA reduced its flights, nor participated in the public tender for the PSO routes launched on 4 June 2021. More generally, Ryanair has kept a limited regularity in its routes since the liberalisation of the connections between São Miguel and Terceira to Lisbon and Oporto, in 2015, and has not increased such frequencies since those of SATA have been reduced (recital 124).

(179) On the basis of the information in its possession, the Commission also notes that, while some of SATA’s routes might be attractive for a competitor on a stand-alone and/or seasonal basis, there are no indications that any competitor could take over the totality of SATA’s routes, including the PSO/SGEI and the cargo activities, which are of specific relevance not only for the fishing industry, but also for the delivery of mail and medical supplies to the Azores archipelago, thus representing a very important service for the local community (recitals 17 to 28). In this sense, contrary to the claimed possibility of SATA’s replacement, none of the direct competitors, including Ryanair, has shown interest in developing direct connectivity with the Azores archipelago in recent years and none of them would provide air cargo services (recitals 25 and 124). In particular, in light of the results of the recent tendering procedure for the award of the PSO routes to connect the Azores archipelago, where SATA was again the single carrier to present an offer (recitals 19 and 122), it would be not only difficult, but also unrealistic to expect any competitor to substitute it fully in the short term.

(180) As Portugal submitted, SATA provides unique connections by offering regular travel schedules within the Azores archipelago and from those islands to mainland Portugal and the Portuguese diaspora community’s main areas of residence (recitals 17 to 26). That network of connections is particularly important given that the residents of the Azores cannot rely on alternative modes of transport, both for inter-island mobility and for travelling outside the archipelago (recital 29). In addition to such essential air transport service, and beyond the PSO routes, SATA significantly and decisively supports one of the most relevant elements of growth of the economy of the Azores, namely tourism. Specifically, without support from the operations of SATA to bring travellers to the Azores archipelago, an important segment of the local companies - namely hotels, restaurants, social and cultural events organising companies, retail shops and other tourism-related activities companies - would have further difficulties surviving the COVID-19 pandemic (section 3.2.2).

(181) Third parties emphasise that they depend on SATA’s services for a large part of their business and activities, which would suffer considerable losses in turnover without SATA’s operations. As Portugal also points out, most of the local business, which is already heavily affected by the COVID-19 pandemic, could not survive this crisis without tourism. In this sense, the great majority of third parties that have submitted comments – in particular, business partners, such as travel agencies, tour operators, hotel associations, ticketing agencies and suppliers, in addition to bodies representing the diaspora and business community of North America – have effectively confirmed the Commission’s findings (recitals 68 and 175) as regards the unique role played by SATA for the development of the economy of the Azores and, as shown by Portugal, the small likelihood that other long-haul or low-cost air carriers would replicate its presence and activities in the Azores in the short-medium term (recitals 122 to 124).

(182) Hence, the Commission considers that the bankruptcy of the beneficiary would risk disrupting an important transport service providing region-wide and, to a lesser extent, international connectivity and network - connecting the outermost Region of Azores internally and with the mainland and Madeira, as well as with the Portuguese-speaking community in North America - which is hard to fully replicate for other suppliers, as set out in point 44(b) of the R&R Guidelines.

The aid supports an undertaking with a systemic role in the Region

(183) As explained in the extension decision

Extension decision, recital 60, referring to the assessment expressed in recitals 75-76 of the opening decision.

, the restructuring aid also seeks to avert the risk of exit of an undertaking with an important systemic role in the Region, within the meaning of point 44(c) of the R&R Guidelines.

(184) In particular, the Commission notes that SATA plays a key role in the economy of the Azores not only in terms of connectivity and tourism, but also in terms of level of employment (recitals 14 to 27). In this respect, SATA’s market exit would be likely to trigger severe social hardship: (i) directly, as one of the main employer of this outermost territory of the Union, with 1150 jobs that would be lost at local level; (ii) indirectly, as an essential support to the regional economy and, thus, the local employers, through its passenger and cargo air transport services. In particular, SATA carries almost half of passengers from the outside to the Azores and 100 % of the passengers among the Azores archipelago, thereby significantly supporting the local tourism industry, which represents around 13 % of the GDP of the ARA (recitals 21, 26 and 65).

(185) SATA’s failure would also trigger negative spill-over effects on its customers and direct and indirect suppliers, taking into account that 100 % of the air cargo within the nine islands of the Archipelago is managed by SATA Air Açores and, through Azores Airlines, over [60-70] % of the air cargo (including fish, mail and medical supplies) from and to outside the Azores (recital 25). Given such pivotal role for the territorial development of the Azores, the exit of SATA would thus lead to severe social and economic hardship for this outermost Region, which already faces important challenges due to the geographic distance and the socio-economic gap with mainland Portugal and the rest of the Union (recitals 65 to 67).

(186) The unprecedented impact of the COVID-19 pandemic has further aggravated such socio-economic conditions, taking also into account the negative effects on tourism, which represents, as remarked, one of the main sources of wealth of the Region of Azores, equal to around 13 % of the Azores’ GDP in 2019. Hence, as submitted by Portugal, the failure of SATA would hinder significantly the economic recovery of this already disadvantaged area (recital 65).

(187) Furthermore, as demonstrated by the observations of many third parties, SATA performs an essential activity in strengthening the territorial and social cohesion of the Azores, inter alia, by ensuring the permanent connection between the dispersed nine islands of the archipelago, as well as by increasing the accessibility of people and assets from the Azores to mainland Portugal and the Union, as well as the USA and Canada, where a major part of the Azorean diaspora resides (recitals from (93) to (101)). In this sense, the failure of SATA would have negative consequences also for the diaspora Portuguese community, which would be only indirectly and after a long journey able to reach this outermost Region of the Union, given the absence of alternative air carriers.

(188) Therefore, the Commission considers that, both as employer and as central element in the economic chain for many other undertakings in the Azores, as well as means to ensure the territorial and social cohesion of such Region, the beneficiary can be considered as an undertaking with an important systemic role in the Region, pursuant to point 44(c) of the R&R Guidelines.

Risk of interruption of SGEI

(189) As explained in the extension decision, the exit of SATA would risk interrupting the SGEIs provided to the Region of Azores and Portugal, to which point 44(d) of the R&R Guidelines refers. In this respect, the Commission also recognised in the opening decision that the PSO flights provided by SATA Air Açores and Azores Airlines are SGEIs provided to the Region and Portugal

Extension decision, recitals 57-59 referring to the assessment expressed in recitals 71 to 74 of the opening decision.

. This is an important and predominant part of SATA activities. Therefore, it is established that the potential failure of SATA would lead to an interruption of the continuity of provision of the SGEI to the Region and Portugal.

(190) With regard to Ryanair’s contention regarding the possibility of replacing SATA even at short notice, the Commission’s preliminary findings in the opening and extension decisions regarding the importance of SATA in ensuring the territorial continuity of the outermost Region of Azores with the Union have been strongly supported by 17 out of 19 third parties that have submitted comments. In this respect, the Commission also notes that the tender procedure launched in 2021 for the intra-islands routes allowed Ryanair to substitute SATA in such PSO routes, had it been interested in expanding its operations to that activity, whereas the tender procedure that will be organised for the connection of Azores with mainland Portugal and Madeira will give further opportunities to all SATA’s competitors to substitute it in the PSO routes to/from Azores. Finally, the commitments undertaken by Portugal to divest Azores Airlines (recitals 62 to 63), offer to Ryanair, as well as other competitors the opportunity to take over all of SATA’s commercial routes and, thus, fully or partly replace SATA in such activity as well.

(191) Furthermore, certain airports have an important role in terms of regional connectivity of isolated, remote or peripheral regions, in particular, in outermost regions of the Union, so that the management of such an airport may be considered a SGEI if part of the area potentially served by the airport would, without the airport, be isolated from the rest of the Union to an extent that would prejudice its social and economic development. In the light of the information provided by Portugal, therefore, the Commission confirms the conclusion of the opening decision

Opening decision, recital 73.

that the airports operated by SGA provide a SGEI for the Region, without which the connectivity and territorial continuity of Portugal and the Union would be curtailed.

(192) Hence, it follows from the information gathered in the course of the investigation that, in the short to medium term, in the uncertain situation and outlook created by the COVID-19 pandemic, the restructuring aid is also essential to avert a serious and imminent risk of interruption to the continuity of PSOs and SGEIs provided by SATA, as referred to in point 44(d) of the R&R Guidelines.

(193) In light of the above, the Commission therefore concludes that the aid contributes to the development of the economic activity of provision of air transport services connecting the ARA in that it allows to maintain important services, including PSO/SGEI, that could be at risk of not being replicated, in their entirety or to a broadly similar extent and without social hardship, by competitors in the short to medium term, with potential negative consequences on the wider economy of the Region, given the persisting effects of the crisis caused by the COVID-19 pandemic (point 44 (b), (c) and (d) of the R&R Guidelines).

5.4.2.2.

Restructuring plan and return to long-term viability

(194) In addition, under point 46 of the R&R Guidelines, the granting of a restructuring aid must be conditional on the implementation of a restructuring plan that would restore the viability of the beneficiary. The remediation of the causes that led to the difficulty of the beneficiary, by facilitating its return to long-term viability, is a necessary condition for the restructuring aid to serve the development of the economic activities and areas where the beneficiary operates. The restructuring aid supports a wide-ranging restructuring plan encompassing the entire range of activities of SATA.

(195) Restructuring aid should only be granted to support a realistic, coherent and far- reaching restructuring plan, the measures of which must be designed to restore long-term viability in a reasonable timescale, excluding any further aid beyond the one supporting SATA’s restructuring plan. The restructuring plan must identify the causes of the beneficiary’s difficulties and the beneficiary's own weaknesses, and outline how the proposed restructuring measures will remedy the beneficiary's underlying problems.

Points 45, 47 and 48 of the R&R Guidelines.

(196) The results of the restructuring must be demonstrated in a variety of scenarios, in particular by identifying performance parameters and the main foreseeable risk factors. The return to viability of the beneficiary must result in an appropriate return on capital invested after covering costs, without depending on optimistic assumptions about factors such as variations of price or demand. Long-term viability is achieved when an undertaking is able to provide an appropriate projected return on capital after having covered all its costs including depreciation and financial charges and is also able to compete in the marketplace on its own merits

Points 50 to 52 of the R&R Guidelines.

.

Assessment of the assumptions underlying financial projections

(197) The Commission notes that the beneficiary’s air traffic recovery projections are based on reliable industry sources (recital 43), and that the recovery of SATA airlines’ performance back to 2019 level is supported by the latest developments. The Commission has cross-checked the assumptions underlying the restructuring plan. In that respect, the latest outlook by IATA of March 2022

See IATA press release of 1 March 2022 at https://www.iata.org/en/pressroom/2022-releases/2022-03-01-01/

in terms of overall traveller numbers, the airline industry would be back to 2019 levels between 2023 and 2024, with improvements in the major North Atlantic and intra-European markets (and more optimistic when compared to the November 2021 IATA outlook). Based on the data provided by Portugal, […]

Portugal submission of 18 February 2022, page 1.

. This is supported by the 2021 solid closing with revenues up by […] % and EBITDA up […] % (non-audited yet) vs. the restructuring plan, whereas 2022 has been marked by a strong start, with passenger bookings in the first half projected to reach a […] % growth compared to same period in 2019. The Commission also notes that based on the IATA outlook, an even faster recovery could be expected for domestic flights (expected to reach 2019 levels by 2023) and touristic flights, and hence the Commission finds that the growth in revenue forecasted by SATA is plausible. The beneficiary’s revenue projections reasonably portray an improved use of fleet capacity and flight optimisation in line with industry averages, as well as the margin for progress in connections of the Azores compared with other islands in the Union (recitals 65 and 66). With regard to the cost projections, the beneficiary’s return to profitability hinges on fleet renewal reducing operating costs, including fuel, reduction of labour costs as well as renegotiation of supply contracts, as described in recitals 44 to 46. Those measures also assume an adequate remuneration of the PSOs (for which compensation is no longer calculated based on operating costs as before the restructuring) or alternatively a withdrawal from the PSOs discharged at present when connecting the Azores with mainland Portugal and/or Madeira.

(198) With regard to labour cost projections, the Commission notes that the beneficiary has already signed agreements with its trade unions (recitals 47 to 50). These agreements provide for […]. Furthermore, the beneficiary has already obtained a reduction of […] employees […] (recital 49(b)(3)). Overall, considering the beneficiary has already achieved negotiations on most of the assumptions underlying the labour cost projections, the Commissions finds those projections credible

Portugal’s submission of April 2021, Summary of potential savings in Sata’s restructuring plan.

.

(199) The Commission considers that the following elements also contribute to the credibility of the financial projections: (i) the beneficiary already identified and started implementing multiple measures aiming to reduce costs other than labour and fuel (recitals 45 and 46); (ii) the restructuring plan focuses on the aviation business and envisages the sale of a majority stake in Azores Airlines (recital 51), which contributed to the difficulties of the beneficiary (section 2.2) and of the ground handling business (recital 54); and (iii), the alternative sensitivity option included in the adverse case scenario, and referring to the possible alternative use of aircraft in the event that Azores Airlines would not be operating PSOs in the future (recitals 58 to 60), is also credible, as it is supported with requests for quotations of charter flights and valid alternative uses of the aircraft and resources now involved in the operation of the PSO routes.

(200) To assess the financial projections, the Commission has compared the beneficiary’s expected EBIT margin (i.e. EBIT divided by revenues) in 2025 to that of a sample of airlines for which stock market analyst forecasts for the same year were provided in the formal investigation

The sample includes: Lufthansa, Norwegian, Eurowings, Ryanair, IAG, Easyjet, Wizz Air and Brussels Airlines (see recital 55).

. The average EBIT margin in a wider sample is 8-12 %, while the beneficiary’s one is expected to be […] %-[…] % for SATA airline business and […] % in the case of the airport management activity of SGA including the expected cash inflow of compensations. Also in light of the fact that the beneficiary’s activity predominantly involves the supply of PSOs and SGEIs whilst the beneficiary’s cost and revenue targets are sufficiently close to those of other airlines, the Commission finds the assumptions underpinning the restructuring plan credible.

Assessment of the beneficiary’s return to viability

(201) The Commission did not raise doubts as to the beneficiary’s return to viability in the extension decision either. The Commission will nevertheless assess, in the light of the updated figures submitted by Portugal whether, at the end for the restructuring period in 2025, the beneficiary expects to generate a sufficient rate of return from its operation and be able to compete on its own merits.

Viability of SATA’s controlled entities post restructuring

(202) Following the planned divestiture of the new ground handling unit and of the 51 % controlling stake in Azores Airlines by 2026, the remaining entities under the control of SATA will be only SATA Air Açores and SGA, which are both discharging PSOs and SGEIs. Therefore, the Commission considers that the assessment of the return to viability should take into account this aspect and therefore, it should be confined to the projections concerning these two entities.

(203) SATA Air Açores will operate pursuant to the PSO contract awarded to it by the Azorean Region for a duration of five years, and will receive for its services the contractual PSO compensation. In the same vein, SGA will continue to provide SGEI services to the five small airports operated by SGA. In other words, the remaining business perimeter under control of SATA will be limited to discharging PSOs as exclusive service provider in intra-island routes and managing the related SGEI business of local airports. By way of illustration, it is appropriate to refer to the guidance set out in the Framework for State aid in the form of public service compensation (SGEI Framework)

Communication from the Commission — European Union framework for State aid in the form of public service compensation (2011) (OJ C 8, 11.1.2012, p. 15).

for the assessment as to whether SATA Air Açores and SGA would be able to provide an appropriate return on capital after covering all of their costs. The SGEI Framework sets out in point 36 that a rate of return on capital that does not exceed the relevant swap rate corresponding to the duration of the entrustment plus a premium of 100 basis points is regarded as reasonable in any event.

(204) According to the relevant entrustment acts, the duration for the PSOs awarded to SATA Air Açores is five years (see recital 19), as well as that for the SGEI services to the five airports is renewable every five years (see recital 22), and the currency of the contracts is the euro. Therefore, the Commission considers that the relevant swap rate for comparison is the six-month EURIBOR (euro interbank offered rate) swap for a five-year maturity, equal to 0,527 %

https://www.chathamfinancial.com/technology/european-market-rates

. Hence, the reference for comparison would be 1,527 %. As from 2023 and until the end of the restructuring period, the EUR […] million EBIT of the reduced perimeter of the company (Table 1.A) would provide a […], taken as a minimal floor for an SGEI/PSO provider. In addition, the EBIT margin for the SATA Air Açores and SGA combined at the end of the restructuring period will be […] %, also in line with the 8-12 % margin industry benchmark in 2018/2019

Benchmark used by SATA for the comparison of Azores Airlines with industry benchmark (see Annex 1, SATA Business Plan 2021-25, slide 69).

. On that basis, the expected return at the end of the restructuring period appears to be adequate.

Viability of the whole perimeter of the SATA Group after the divestiture

(205) The Commission will also assess the overall returns for the SATA Group at the end of the restructuring period, i.e. taking into account also the 49 % remaining shareholding in Azores Airlines. With respect to the beneficiary’s overall ability to generate a sufficient return from its operations in 2025, a customary approach is to compare the ROCE in 2025 to the WACC. If the former is greater than the latter, the operations of a company are able to generate sufficient profits to cover its cost of capital, which is an indication of that company’s viability.

(206) The beneficiary’s ROCE, whose calculation hinges on the financial projections that the Commission has assessed as credible in recitals 197 to 200, is expected to be […] % in 2025 (Table 1.A). The ROCE value of […] % expected for SATA is higher than a WACC of […] % (recital 55). The components of the WACC are appropriately justified, based on market data and financial information on the beneficiary’s peers retrieved from Orbis and Bloomberg

WACC is calculated as the weighted average of the beneficiary’s cost of equity (16 %) and after tax cost of debt (9,1 %), with weights equal to the beneficiary’s target debt to debt plus equity ratio (473,8 %), in line with standard methodology. Risk free rate consisting of mid yield to maturity of Azores Bonds 2030 (Bloomberg), market risk premium from industry consensus Equity Market Risk Premium – Research Summary – 2020 – KPMG, small cap premium and ultra-periphery premium IMAP assumption. Corporate debt spread TAP 4 3/8 2023, target D/E from Bloomberg (selected peers).

. Therefore, the Commission considers that the beneficiary will be able to return to viability in 2025, […].

(207) Furthermore, the expected ROCE in 2025 of the beneficiary, including the airport business, is […] than the median 2019 ROCE (11,8 %) of the airlines listed in recital 56. This is an additional indication of the beneficiary’s return to viability, since those airlines were able to compete in the market on their own merits in 2019.

(208) With regard to the beneficiary’s ability to compete on its own merits at the end of the restructuring period, the SATA Group will have a very small size and a limited scope of operations consisting of discharging PSOs and providing genuine SGEIs with contracts awarded by the Azorean Region, which limits commercial risks. Such PSOs confer stability of operations and the restructuring plan does not envisage diversification to new riskier activities, so that SATA’s creditworthiness would normally allow access private funding markets without any aid from the Azorean Region post-restructuring.

(209) In addition to the baseline scenario, Portugal also provided an adverse scenario for the duration of the restructuring plan until the end of 2025 (recital 60). In light of the positive developments of the main indicators registered in the first three quarters of 2021 (recital 52), the adverse scenario is conservative. In the scenario with 15 % less revenue and no PSO obligations, the beneficiary would generate a positive EBIT as of […] (Table 3). The beneficiary’s ability to access capital markets and compete on its own merits in 2025 would be nearly equivalent to the base case scenario, because the equity position would be improving continuously and become positive as of 2026 (EUR […] million) whilst Azores Airlines would not in any event incur uncompensated costs of PSOs. While the adverse scenario indicates a negative impact on the profitability and creditworthiness of the beneficiary, it does not jeopardise SATA’s return to viability by 2025.

(210) For the reasons set out above, the Commission considers that the implementation of the restructuring plan should allow the beneficiary to be able to compete on its own merits without further rescue or restructuring aid after the end of the restructuring period at the end of 2025.

Conclusion on the development of economic activities and areas

(211) In conclusion, the Commission considers the beneficiary’s restructuring plan as realistic, coherent and credible. As such, it is suitable to restore the beneficiary’s long-term viability, within a reasonable period of time, without relying on further State aid. Therefore, the restructuring aid meets the requirements provided for in points 44(b), (c) and (d) and 46 of the R&R Guidelines, thus contributing to developing the economic activity of air transport services connecting the Region of the Azores, in accordance with Article 107(3), point (c) TFEU.

5.4.3.

Positive effects of the aid on the development of economic activities outweigh the negative effects, in terms of distortions of competition and adverse effects on trade

(212) In order to assess whether the aid does not unduly affect the competition and trading conditions it is necessary to examine the necessity, the incentive effect, appropriateness and proportionality of the aid, and to ensure transparency. It is also necessary to examine the effects of the aid on competition and trade and weight the positive effects of the aid for the development of the economic activities and areas that the aid intends to support, as described in section 5.4.2, against its negative effects on the internal market.

5.4.3.1.

Necessity and incentive effect

(213) Under point 53 of the R&R Guidelines, Member States that intend to grant restructuring aid must provide a comparison with a credible alternative scenario not involving State aid, demonstrating that the development of the economic activities or areas sought by the aid, referred to in section 3.1.1 of the R&R Guidelines will not be attained or would be attained to a lesser degree. Also, Member States must show that, in the absence of the aid, the beneficiary would have been restructured, sold or wound up in a way that would not have achieved the development of the economic activities or areas concerned (point 59 of the R&R Guidelines).

(214) The objective of the restructuring aid is to prevent SATA from going out of business, and thereby to avert a situation of market failure and social hardship, which would inhibit the development of air transport services connecting the Region of the Azores with the mainland. That objective is achieved through the implementation of the restructuring plan, partially financed by the restructuring aid. The restructuring plan shows that in the short term, without liquidity support, SATA would not be able to continue providing essential air transport, comply with financial obligations or have access to financial markets (recitals 64 and 176). In the long term, given the sheer negative equity (of EUR - 319,5 million in 2021) that would continue for a prolonged period, […]. The restructuring aid is therefore necessary for the successful completion of the restructuring plan, the implementation of which in turn seeks to facilitate the development of air transport services connecting the Region of the Azores.

(215) On the basis of the above assessment on the need for State intervention, the Commission also concludes that the aid has an incentive effect, as without the restructuring aid SATA would almost certainly fail, depriving the local community of an essential instrument of economic and social development, so that the requirements set out in points 38(d) and 59 of the R&R Guidelines are met.

5.4.3.2.

Appropriateness

(216) Under points 38(c) and 54 of the R&R Guidelines, restructuring aid will not be considered compatible with the internal market if other less distortive measures achieve the same objective. As point 58 of the R&R Guidelines lays down, the aid instruments chosen must be adapted to the liquidity or solvency issue of the beneficiary that it is intended to address.

(217) SATA faces problems of solvency and liquidity, which the restructuring aid needs to address adequately. The blending of fresh capital and guaranteed debt provided as restructuring aid addresses in parallel a situation of extreme deterioration of the equity of SATA, which is deeply negative, whilst servicing the existing debt and meeting cash flow needs for regular operation.

(218) In that respect, the Commission considers the restructuring aid of EUR 453,25 million to SATA as appropriate as regards to the form, for two main reasons: (i) given that SATA is an undertaking in difficulty with negative equity in 2020 and in 2021 (recital 31), absent the restructuring aid improving its solvency, the beneficiary would not be able to build enough equity to offset past losses and be able to attract significant long-term funding in capital markets, and (ii), the liquidity projections show that, absent the restructuring aid, the beneficiary would have a negative cash position until 2023, which would worsen without equity injections, conversions of debt into equity or public guarantees for the amount of liquidity that SATA is unable to access at market conditions. For these two reasons, the Commission concludes that the form of the restructuring aid provided mainly through equity measures is the most appropriate way to address SATA’s problems of solvency and liquidity.

(219) The Commission therefore concludes that, by adequately addressing solvency and liquidity issues of SATA, the restructuring aid is appropriate.

5.4.3.3.

Proportionality, own contribution and burden-sharing

(220) The R&R Guidelines provide that the aid must not exceed the minimum needed to achieve its objective

Point 38(e) of the R&R Guidelines.

. The amount and intensity of restructuring aid must be limited to the strict minimum necessary to enable restructuring to be undertaken, in the light of the existing financial resources of the beneficiary, its shareholders or the business group to which it belongs

Point 61 of the R&R Guidelines.

. In particular, a sufficient level of own contribution to the costs of the restructuring and, where State support is given in a form that enhances the beneficiary's equity position, burden sharing must be ensured. The assessment of those requirements will take account of any rescue aid granted beforehand.

Own contribution

(221) The own contribution of the beneficiary to the restructuring plan must be real and accurate and should normally be comparable to the aid granted in terms of effect on the solvency or liquidity position of the beneficiary. Pursuant to point 63 of the R&R Guidelines, the Commission needs to assess whether the various sources of own contribution are accurate and aid-free. According to point 64 of the R&R Guidelines, the Commission normally considers the own contribution to be adequate if it amounts to more than 50 % of the restructuring costs, save for situations of exceptional circumstances or particular hardship, in which the Commission can accept lower own contribution as long as they remain significant. Furthermore, where the specific circumstances of assisted areas so require, for example, where a beneficiary faces particular difficulties in raising new market financing as a result of its location in an assisted area, the Commission may accept a contribution which is less than 50 % of the restructuring costs for the purposes of point 64 of the R&R Guidelines

Point 98 of the R&R Guidelines.

.

(222) The Commission needs to verify whether the various sources of funding to the plan described in recitals 49 and 50 are free of aid and real, which means sufficiently certain to materialise in the course of the implementation of the restructuring plan, excluding expected future profits. Contributions by the State, such as, in the present case, those made by the ARA in its position as sole shareholder of SATA, are not free of aid and cannot be taken into account in the assessment.

(223) From the sources of own financing put forward by Portugal (recitals 49 and 50), the only amounts that appear to be sufficiently real and actual are the contributions for approximately EUR […] million, relating to:

(a) labour streamlining measures (EUR […] million) (recital 49(b)(3));

(b) saving generated through increased operating efficiency (recital 49(a)), for EUR […] million, and other third parties’ contributions, for EUR […] million in addition to fleet restructuring for EUR […] million (recitals 49(b)(1) and 49(b)(2)), for an overall amount of EUR […] million;

(c) reduced charges negotiated with creditors for EUR […] million (recital 50(3));

(d) sale of assets ( […] ) and other savings for a total of EUR […] million (recital 49(b)(4);

(e) contributions from own revenues to the amortisation of […] (EUR […] million) and to the cost of restructuring (EUR […] million) (recitals 50(1) and 50(2)), and

(f) a non-public guaranteed financing of EUR […] million from a commercial bank ( […] ) (recital 50(4)).

(224) Firstly, out of the EUR […] million labour streamlining measures (recital(49)(b)(3)), proposed by Portugal, only the payment of labour restructuring indemnities (second indent), for EUR […] million, can be considered real and actual, as SATA has already paid out the amount and it relates to restructuring costs incurred as precondition for reducing the number of employees as provided for in the restructuring plan. Such costs are immediate, given that SATA has already terminated labour contracts and reduced staff, as part of the restructuring undertaken since 2021, and its financing source can be considered aid-free, as SATA has paid them with operational cash flow and are not

financed by State aid, neither from the equity nor from the State guaranteed loans. Hence, the payment of indemnities can be considered as part of the beneficiary’s own contribution to the restructuring costs and can be regarded as actual, within the meaning of point 63 of the R&R Guidelines. On the contrary, in keeping with the Commission’s established practice, staff salary […] during 2021 and 2022 (EUR […] million) and renegotiated labour agreements with trade unions to improve crew productivity (EUR […] million) cannot be accepted as the beneficiary’s own contribution. Savings in wage costs involve a reduction of intrinsic, purely internal costs of the undertaking that is necessary in view of its restructuring

Commission Decision of 9 November 2011 in case SA 31250 (N/2011) - Restructuring of BDZ – Bulgaria (OJ C 10, 12.1.2012, p. 9), recital 79: […] Payroll reductions as well as future saving on costs for social security seem to be necessary restructuring measures rather than an own contribution […].

.

(225) Secondly, in this respect, the contributions from third parties or cost-efficiency measures may amount to real and actual sources of own contribution, provided that they are permanent cost reductions, borne or made possible by external suppliers or clients with the beneficiary, and they result from binding agreements and are effective and not reversible

Commission Decision of 30 April 2021 in case SA.58101 (2020/C) and SA.62043 (2021/N) – Portugal - Rescue aid and Restructuring aid to SATA Group (OJ C 223, 11.6.2021, p. 37), recital 72; Commission Decision of 26 July 2021 in case SA.63203 (2021/N) – Germany - Restructuring aid for Condor (not yet published), recital 132(c); Commission Decision of 12 May 2016 in case SA.40419 (2015/NN) – Restructuring aid for Polzela (OJ C 258, 15.7.2016, p. 3), recital 119.

. The Commission has already considered that reductions of contractual liabilities set out in renegotiated agreements with suppliers and lessors amount to real sources of own contribution: compared to the terms of the initial agreements, they free resources that are available for financing restructuring costs, which otherwise would have to be spent on repaying the associated payables

Commission Decision of 8 June 2015 on the State aid which Slovenia is planning to implement for the Cimos Group (SA.37792 (2014/C) (ex 2013/N)) (OJ L 59, 4.3.2016, p. 168), recital 80.

. The same is true with regard to suppliers and buyers that firmly commit to, or amend the terms of their contracts freeing resources from the beneficiary

Commission Decision of 20 August 2018 in case SA.51408 (2018/N) – Aid to Terramass B.V. (OJ C 406, 19.11.2018, p. 10), recitals 22 and 71.

.

(226) SATA’s cost reductions deriving from increases in operating efficiency and from negotiations with suppliers (recitals 49(a) and 49(b)(2)), totalling EUR […] million, as well as the fleet restructuring measures (around EUR […] million, see recital 49(b)(1)), can be considered real sources of own contribution, as those savings result from binding agreements that are already in place and are thus sufficiently certain to be deemed actual

See submission by Portugal on 2 December 2021.

. Indeed, such measures have the same financial effect as the write-off of debt in insolvency proceedings, except that the effect is spread over years and is not one-off. Hence, these amounts (EUR […] million) can be added to the debt reduction negotiated by SATA […] EUR […] million (recital 50(3)), so that the total amount of third party contributions that can be considered real and actual is equal to around EUR […] million. Such an amount can also be considered aid-free, as the corresponding measures share the financial burden of SATA’s restructuring costs with suppliers and lessors that would be otherwise entitled to higher payables on SATA’s positive operating results. Likewise, in the case of the debt write off, which involves both public and private operators, there are no indications of that write-off giving rise to State aid.

(227) Thirdly, the proceeds […] of assets and activities relating to SATA’s tour operators in North America and other savings for the amount of EUR […] million (recital 49(b)(4)) can be considered as real and actual contribution to the restructuring costs of the beneficiary. That revenue has already been generated (except for the proceeds from the liquidation of Azores Vacations America that are already quantified and will be transferred to SATA upon the completion of the liquidation of that company). Likewise, increased revenues from operations compared to the original projections in the restructuring plan have allowed SATA to cover costs of amortisation of the Legacy debt (EUR […] million, recital 50(1)) and other costs of restructuring (EUR […] million, recital 50(2)). These own contributions can also be considered as real and actual, given that these amounts have already been paid by the beneficiary.

(228) Finally, the fresh funding by a private financial institution ( […] ) of EUR […] million (recital 50(4)), not guaranteed by the Region, can be considered real and actual given that it has been already negotiated with the financial institution and can be executed in 2022. Furthermore, since SATA has the opportunity to choose among […] alternative suitable lenders, the possibility of funding by private investors also indicates its ability to restore its full access to capital markets and represents a signal of market confidence in its return to viability.

(229) Contrary to the views of the Portuguese authorities, the proceeds from the sale of the majority stake (51 %) of Azores Airlines and the entire ground-handling business (recital 51), even if already scheduled to take place by the end of the restructuring plan, cannot be considered as real and actual. In particular, the corresponding amounts (around EUR […] million) consist of expected financial resources relating to the sale of assets that have not yet taken place and, although the Portuguese authorities have submitted their firm commitment to the divestiture, the process of privatisation has not yet started and there are no identified or even potential buyers for the acquisition.

(230) The Commission thus estimates the overall own contribution that can be considered real and actual to be at most EUR […] million, representing approximately 30 % of SATA’s eligible restructuring costs, which, differently from what Portugal calculated (recital 47), are equal to EUR […] million, as they include and are financed by the restructuring aid in the amount of EUR 453,25 million in addition to the said maximum amount of own contribution. The remaining costs, such as working capital, will need to be covered with SATA’s normal operating revenues or improved payment terms not yet defined. The estimated proportion of 30 % of own contribution and 70 % of restructuring aid is manifestly conservative as, in the absence of any commitment from one or several identified buyers, it does not factor in, as sufficiently actual contribution, any proceeds from the future divestments to which Portugal commits before the restructuring plan. This approach disregards the future value of the shares of Azores Airlines and the ground handling business. The positive operating results expected at the end of the restructuring plan for these two businesses make it likely for the ARA to recover and reduce the amount of aid by a few dozens of millions of euro. In any event, the overall own contribution to the restructuring costs by the beneficiary, even if below the 50 % minimum normally required, may still be accepted, in line with points 64 and 98 of the R&R Guidelines.

(231) In particular, in the current circumstances following the outbreak of the COVID-19 pandemic, the Commission considers that it may be justified, depending on the individual case, that own contribution remains below the threshold of 50 % of the restructuring costs, as long as it remains significant, as required by point 64 of the R&R Guidelines. By way of indication of a level which the Commission would consider appropriate, in its case practice, the Commission has considered that an own contribution amounting to 24 %-35 % of the restructuring costs may be significant and, thus, that restructuring aid amounting to around 65 %-76 % of the restructuring costs may be proportionate

In the Decision of 26 January 2022, SA.59974 (2021/C) – Romania - Restructuring of CE Oltenia (not yet published), recitals 214 to 219, the Commission considered acceptable a level of own contribution of 32 % of the restructuring costs. Similarly, in the Decision of 21 December 2021, SA.60165 - Portugal - Restructuring aid to TAP SGPS (not yet published), recital 263, the Commission accepted a own contribution equal to 35 % of the restructuring costs. Under the 1999 R&R Guidelines, which required that the own contribution ought to be significant, without specifying a minimum threshold of application, which was set to 50 % in the 2004 R&R Guidelines, in the Decision of 24 April 2007 relating to the aid measure implemented by Belgium in support of Inter Ferry Boats (C 46/05 (ex NN 9/04 and ex N 55/05)) (OJ L 225, 27.8.2009, p. 1), recitals 348-350, the Commission had also accepted an own contribution of 24 %.

.

(232) In the case of SATA, the Commission considers that Portugal has demonstrated the presence of exceptional circumstances relating, in particular, to the fact that the COVID-19 pandemic and the measures taken to contain it have created exceptional circumstances for this small regional airline, in the context of a serious disturbance of the economy within the meaning of Article 107(3), point (b), TFEU, with immediate impact on the aviation and tourism sectors and its ability to raise market funding (recitals 34 to 37), although the Commission notes the fact that, despite those unfavourable circumstances, SATA still managed to raise a certain amount of fresh market funding as mentioned in recital 228. In particular, considering the lower operation levels linked to the steep decrease in travel demand to the Azores from March 2020 onwards, the COVID-19 pandemic has affected particularly SATA, beyond the direct losses due the travel bans and restrictions adopted by the public authorities in

the Union, as it mainly operates PSO routes and SGEIs in the Azores, so that it has a very limited ability to diversify its services to other activities or destinations. In terms of own contribution, the presence of fresh funding at market conditions, representing almost one third of the sources of financing put forward by Portugal, is also in line with point 14bis of the Temporary Framework, where the Commission, in view of the unique situation created by the COVID-19, clarifies that it may be justified that, in individual cases, own contributions within the meaning of points (62) to (64) of the R&R Guidelines remain below 50 %.

(233) Furthermore, the Commission gives particular consideration to (i) the unique function and position of the beneficiary in an outermost region of the Union that is also an assisted area (point 98 of the R&R Guidelines), as well as (ii) the paramount role played by SATA in ensuring territorial continuity – through PSOs and SGEIs - between the Azores islands, as well as between those island and mainland Portugal and Madeira. As for the first aspect, the Commission considers that the information provided by Portugal demonstrates SATA’s difficulty in raising new market financing due to its location in an assisted area of an outermost region of the Union and that such difficulty goes beyond how difficult that access is for SATA only due to its financial standing (recital 67). In respect of the second point, the Commission also notes that the beneficiary serves as PSO/SGEI provider the distinct and specific socio-economic needs of an assisted area in an outermost region, as referred to in Article 349 TFEU. The vast majority of third parties supported this view in their interventions on the opening and the extension decisions, by stressing the unique role played by SATA, which is the only air carrier connecting the individual islands of the Azores, as well as providing air cargo to the Azores and flying from that outermost region of the Union to North America (recitals 93 to 101). Finally, the Commission takes into account the limited size and business of SATA, currently with only 13 airplanes (downsized from 15) and, following the sale of the controlling shareholding of Azores Airlines at the end of the restructuring period, only six airplanes. The Commission thus applies the exception provided for in point 98 of the R&R Guidelines to the case at hand and accepts the own contribution assessed in recitals 223 to 230, which, in any event, is still significant.

Burden sharing

(234) Pursuant to points 65 to 67 of the R&R Guidelines, State support given in a form that enhances the beneficiary's equity position can have the effect of protecting shareholders and subordinated creditors from the consequences of their choice to invest in the beneficiary, thus creating moral hazard and undermining market discipline. The restructuring aid does not incentivise moral hazard or excessive risk taking having benefitted shareholders or creditors. Indeed, the ARA, which is now the aid provider, has been overseeing and taking as sole shareholder all the strategic and commercial decisions of SATA, whilst the company’s operation has not been funded with subordinated debt or hybrid (loss-absorbing) funding likely to be partly written off in line with the burden sharing requirements of the R&R Guidelines.

(235) Since SATA is fully owned by the ARA, in the current circumstances the enhancement of the beneficiary’s equity position and any potential upsides envisaged from a successful restructuring supported by the aid provided by the ARA, including sales proceeds from foreseen asset divestments will fully accrue to the aid grantor in its capacity as sole shareholder. Burden sharing by existing shareholders can therefore be considered as irrelevant in the present case. SATA and the ARA have, for a long time, been negotiating with banks and other financial institutions with regards to the outstanding amounts of SATA’s debt. Senior creditors have already agreed reductions of spread and longer maturity, as well as reductions of interest and commissions (recital 50), reducing future cash outflows of SATA, a fully publicly owned company, whose financial difficulties can only be imputed to its sole shareholder, the ARA. Furthermore, as explained by Portugal (recitals 111 to 112), the ARA is a borrower on the global financial markets, as well as the guarantor of SATA’s financial debt, so that debt write-offs might harm market confidence with regard to the ARA itself, with potential spill-over effects to other companies of the Regional public sector.

(236) In light of the above, the Commission considers that the restructuring aid fulfils the conditions of the R&R Guidelines with respect to proportionality, own contribution and burden sharing.

5.4.3.4.

One time, last time principle

(237) In order to ensure that the negative effects of the aid are limited, to avoid undue effects on competition and trade and to ensure that the overall balance is positive

Point 38(f) of the R&R Guidelines.

, aid must be granted to undertakings in difficulty in accordance with the one time, last time principle. In light of this principle, it is necessary to limit such aid for a period of ten years.

(238) The Commission allows restructuring aid only in support of one restructuring operation and provided, if appropriate, that more than ten years have elapsed after an earlier granting of restructuring aid or after the restructuring period had come to an end or the implementation of the restructuring plan was halted

Points 70 and 71 of the R&R Guidelines.

. If such aid was granted, the Commission permits exceptions to that rule notably where restructuring aid is subsequent to rescue aid as part of a single restructuring operation or in exceptional and unforeseeable circumstances for which the beneficiary is not responsible

Points 72(a) and 72(c) of the R&R Guidelines.

.

(239) The restructuring aid to SATA supports a single restructuring operation, which has been already undertaken since the end of 2020 and will last until the end of 2025. The Commission notes that, as part of that operation, Portugal notified the rescue aid and the Commission approved the grant of liquidity support to SATA under point 103 of the R&R Guidelines. The Commission approved the grant of that support both when opening a formal investigation into the rescue aid and when extending that investigation into the restructuring aid, in order to maintain SATA’s essential activities related to the provision of PSOs in the field of air transport to the Azores Region and to the management and operation of SGEIs in the airports in that Region. Therefore, the grant of that support did not have the effect of preventing SATA from receiving the restructuring aid in question.

(240) As regards other State aid granted to SATA in the past and potentially relevant for the application of the one time, last time principle, the Commission notes that it has approved a EUR 12 million compensation aid to SATA under Article 107(2), point (b), TFEU in the circumstances of the exceptional occurrence of the COVID-19 pandemic

Commission Decision in case SA.61771 (2021/N) COVID - 19 - SATA - Compensation of damages resulting from extraordinary events (OJ C 285, 16.7.2021, p. 7).

. That aid, however, does not amount to past rescue or restructuring aid: it compensates the damage directly caused by the COVID-19 outbreak from 19 March 2020 to 30 June 2020 and covers costs that SATA would not have incurred in the absence of air travel restrictions imposed on public health grounds prompted by that exceptional occurrence. In particular, other costs incurred by SATA from 19 March 2020 to 30 June 2020 as a result of government restrictions not amounting to travel bans/or air travel restrictions, as well as reduced demand stemming from the serious economic disturbance of the Portuguese economy in 2020-2021 were excluded from compensation.

(241) As regards compensations for PSO and SGEIs, since 1996 SATA Air Açores has been providing services on the 14 inter-island routes referred to in recital 19) under PSOs imposed according to, initially, Regulation (EEC) No 2408/92 and, later, Regulation (EC) No 1008/2008. Those PSOs were included in contracts that provided a compensation for the service provided on the basis of an ex ante method for compensation calculation, yearly allowance and a mechanism for compensation adjustments that ensured the absence of overcompensation. Likewise, the SGEI provided by SGA is set out in a concession contract, which includes compensation determined ex ante for the period of that entrustment. The objective and the effect of granting such compensation to SATA was to cover the costs of performing the PSOs and SGEIs concerned, and not to rescue or restructure SATA.

(242) Finally, with regard to the past capital increases of SATA subscribed in 2017-2020 by the Region, according to Portugal, they amount to a compensation for PSO and SGEI costs incurred by SATA and, in particular, were granted to partly cover the operational deficit of Azores Airlines between 2009 and 2019 for the provision of services discharging PSOs or SGEIs on the routes to mainland and Madeira (recitals 106 and 107), as well on the routes from Azores to North America (recital 108). Ryanair considers that, because of the capital increases, the Commission should not authorise any rescue aid in favour of SATA, as the COVID-19 crisis should not be considered as an exception to the one time, last time principle.

(243) The Commission recalls that with respect to routes within the Union, any compensation claimed for the past would not be in line with Regulation (EC) No 1008/2008. In fact, the routes were subject to an open PSO. As recalled by Portugal (recital 107), Azores Airlines expressed repeatedly its interest to operate those routes according to the PSO conditions and without compensation. Therefore, any compensation granted to Azores Airlines for the provision of services on those routes under the open PSO would breach Article 17(8) of Regulation (EC) No 1008/2008 and qualify as unlawful and incompatible State aid. This is regardless of the fact that by engaging in this activity, Azores Airlines incurred losses that could have been avoided or reduced if it had operated only the commercially attractive routes, schedules and services.

(244) Likewise, any purported compensation of losses incurred in discharging PSOs or providing SGEIs on routes from the Azores to North-America would also qualify as unlawful and incompatible State aid. In fact, Azores Airlines has been operating those extra-EU routes on a commercial basis, without an entrustment act. Therefore, Portugal cannot validly claim that the compensation for those routes is compatible with the SGEI Decision 2012/21/EU, since Article 4 thereof requires that the undertaking concerned is to be entrusted with the operation of the SGEI by way of one or more acts. In the same vein, in the absence of an entrustment act, any such compensation cannot be considered compatible under the SGEI Framework

Communication from the Commission — European Union framework for State aid in the form of public service compensation (2011), p. 15, points 15 to 17.

.

(245) It follows that the capital increases provided as compensations for PSO or SGEI costs amount to unlawful and incompatible State aid under the rules set out in Regulation (EC) No 1008/2008, the SGEI Decision 2012/21/EU or the SGEI Framework.

(246) After the opening of the formal investigation, the Portuguese authorities have requested SATA to reimburse the past capital increases in SATA Air Açores subscribed by the Regional Government since 2017, totalling EUR 72,6 million that had been granted and were almost entirely disbursed to the company before the initiation of the procedure (recital 71)

Recital 13 of the opening decision.

. On 1 June 2021, Portugal submitted evidence to the Commission showing the transfer back to the Region in three instalments of the total amount of capital provided to SATA (recitals 9 and 116).

(247) As a consequence of such reimbursement, SATA has proceeded with a reduction of its share capital and has registered that decrease in the Portuguese Commercial Registry. Portugal also provided evidence of the payment of recovery interest for an amount of EUR 815233,24 that was transferred to the Region on 30 November 2021. The amount corresponds to the recovery interest referred to in Article 11 of Regulation (EC) No 794/2004 calculated on each of the past capital increases from the date when SATA received the relevant capital increase until the date when it was repaid.

(248) The Union Courts have consistently held, with respect to unlawful and incompatible State aid, that the purpose underlying the recovery of such aid is to remove the distortion of competition caused by the competitive advantage, which the recipient of the aid has enjoyed in the market as compared with its competitors, thereby restoring the situation which existed before the aid was paid

Judgment of the Court of Justice of 11 December 2012, Commission v Spain (Magefesa II), C-610/10, ECLI:EU:C:2012:781, paragraph 105; judgment of the Court of Justice of 17 November 2011, Commission v Italy, C-496/09, ECLI:EU:C:2011:740, paragraph 61.

. By repaying such aid, its recipient forfeits such competitive advantage

Judgment of the Court of Justice of 4 April 1995, Commission v Italy (ALFA Romeo), C-348/93, ECLI:EU:C:1995:95, paragraph 27.

, whereas by paying interest on such aid, it forfeits the advantage arising from the availability of the aid, free of charge, from the date when it was put at the recipient’s disposal until the date when it is paid back

Judgment of the Court of First Instance of 8 June 1995, Siemens v Commission, T-459/93, ECLI:EU:T:1995:100, paragraphs 97-101.

. The Commission is thus satisfied that the repayment with interest calculated in accordance with Article 11 of Regulation (EC) No 794/2004 and the reduction of share capital removed the competitive advantage to SATA of the capital increases.

(249) Notwithstanding the repayment of the amount of capital increases and removal of any competitive advantage conferred on SATA, the Commission will also assess whether the notified restructuring aid to SATA, in light of the capital increases, would breach the one time, last time principle set out in points 70 and 71 of the R&R Guidelines.

(250) The evidence provided in the proceedings allows the conclusion that the capital increases to the benefit of SATA were decided since 2017 by its sole shareholder in order to compensate SATA for its PSOs and SGEIs, in a context where the costs and operating deficits of meeting PSO obligations discharged since at least 2009 were not lawfully compensated (recitals 102 to 108). However, such compensation not provided for ex ante in the relevant PSCs or entrustment acts, thus, ex post facto is neither allowed under Article 17(8) of Regulation (EC) No 1008/2008, nor under the SGEI Decision 2012/21/EU or the SGEI Framework. The Commission notes that, contrary to SATA Air Açores and SGA, which had positive net earnings, Azores Airlines incurred relatively significant operating losses and negative net earnings (recital 32). In any event, as regards the alleged amount of the compensations Portugal has not demonstrated that SATA, due to its discharging the PSOs in question, effectively incurred an amount of costs and losses that would match the amount of the purported compensation in the form of capital increases. Furthermore, even if the amount of the ex post compensations for audited PSOs/SGEIs operations (EUR 65,5 million) could be found substantiated, the further deficit claimed by SATA (EUR 33 million) for its PSOs (recital 102) could not be considered duly demonstrated, in the absence of sufficient evidence supporting that amount (notably given that it was not confirmed by public audits, unlike the EUR 65,5 million amount that was attributed exclusively to the SATA airline’s PSO operations). The Commission also notes that the abovementioned EUR 33 million amount indistinctively covers costs for both airlines, not allowing to establish how much of that deficit was attributable to either of those airlines. It follows that the past capital increases cannot be considered compatible with the internal market as compensation for SATA’s operational deficits stemming from its PSO and SGEI operations, as no such compensation had been provided for ex ante, and in any event Portugal has failed to demonstrate the amount of such operational deficits and to reconcile that amount with the amounts of the past capital increases. On those grounds, and absent any alternative compatibility grounds that Portugal would have argued and established, the Commission concludes that the past capital increases constitute incompatible State aid.

(251) However, the objective and the effect of the capital increases, as described in recital 102, was not to rescue or restructure SATA. Portugal explains that the intervention of the ARA, regardless of compatibility with Regulation (EC) No 1008/2008, was meant to compensate SATA for its PSOs. Indeed, the information submitted by Portugal

Portugal’s submission of 19 October 2020, pt. 167 ff. and Portuguese Court of Auditors’ Opinion on the 2017 ARA accounts https://www.tcontas.pt/pt-pt/ProdutosTC/PareceresTribunalContas/pareceres-craa/Documents/2017/sratc-cra-2017.pdf.

shows that the 2017 capital increase (EUR 21,5 million), was ultimately aimed at tackling SATA’s capital shortfalls to allow it to continue to fly and connect the Azores islands. Likewise, the evidence gathered in the proceedings shows that ARA adopted the subsequent decisions of capital increases of 2018 (EUR 27 million) and 2020 (EUR 24 million) with a view to comply with its (sole) shareholder’s obligation to deliberate regarding the company’s capital losses

See footnote 109.

, as well as allowing SATA to maintain regular compliance with its corporate purpose of inter-island scheduled air transport

Resolution of the Council of Government no 85 of 18 July 2018.

and providing it with the financial conditions necessary for the fulfilment of its objectives

Resolution of the Council of Government no 66/2020.

. While the past capital increases cannot be accepted to constitute compatible compensation of the PSOs discharged and SGEIs provided by SATA, their objective and effect was to address SATA’s operational deficits stemming from the performance of such PSOs and SGEIs, hence they were not of the same type as the present restructuring aid supporting the restructuring plan

Points 71 and footnote 38 of the R&R Guidelines.

.

(252) Even if the capital increases amounted to rescue or restructuring aid, quod non, a breach of the one time, last time principle could still be held to exist if the new restructuring aid were considered to reveal recurrent difficulties or ones that were not adequately addressed in the past, as mentioned in point 70 of the R&R Guidelines. Even on that assumption, the Commission does not apply the principle mechanically, but needs to take into account the circumstances in which the notified restructuring aid is granted to SATA by way of exception to the one time, last time principle (point 72(c) and footnote 40 of the R&R Guidelines). The Commission can allow further

restructuring aid under the exception set out in point 72(c) of the R&R Guidelines, if those exceptional and unforeseeable circumstances for which SATA is not responsible are established, as the opening and the extension decisions recall

Recitals 90 and 91 of the opening decision and 79 and 80 of the extension decision.

.

(253) The outbreak, spread and economic effects of the COVID-19 pandemic are exceptional and unforeseeable circumstances of the kind referred to in point 72(c) of the R&R Guidelines: they were unprecedented (since the time when the Union and its internal market were established), as much as they were also unforeseeable and unforeseen a few months before their occurrence. They could not have been anticipated by the beneficiary’s management when the capital increases were provided or a few months before the need for urgent rescue and subsequent restructuring arose, nor are they due to negligence or errors of management or decisions of SATA’s group, in line with the criteria recalled in footnote 40 of the R&R Guidelines. In various decisions the Commission has recognised the exceptional nature and impact of COVID-19 in Portugal and in particular on the Azores economy so as to qualify as serious disturbance in the economy pursuant to Article 107(3), point (b) TFEU and how the impact is still felt because of the disturbance of the supply chains, the reduction of the demand and its consequent impact on the liquidity of many undertakings

Commission Decisions of 16 April 2021 in Case SA.62505 (2021/N) COVID-19: Amendment of SA.56873 Direct grant scheme and loan guarantee scheme (OJ C 177, 7.5.2021, p. 21), of 7 March 2022 in Case SA.100205 (2022/N) – Portugal - COVID-19: Direct grants to micro, small and medium-sized enterprises in specific sectors established in the Outermost Region of the Azores (APOIAR.PT Açores) - November 2021 to January 2022, not yet published, of 4 June 2021 in case SA.63010 (2021/N) COVID-19: Aid to passengers transport sector in Azores (OJ C 233, 11.6.2021, p. 33), of 13 September 2021 in case SA.64599 (2021/N) COVID-19: Aid to passengers transport sector in Azores for 2021 (OJ C 389, 24.9.2021, p. 16), of 6 April 2022 in case SA.102334 (2022/N) – Portugal - COVID-19: Aid to passengers transport sector in Azores for 2022, not yet published (in particular recitals 4, 36 and 37).

. The exceptional and unforeseen circumstance of the COVID-19 pandemic and the serious economic disturbance in which SATA’s multifaceted and far-reaching plan for restructuring and increasing efficiency of operations needs to be implemented cannot be imputed to the beneficiary’s responsibility.

(254) It is apparent that the impact of such exceptional circumstance has considerably deteriorated the operation of SATA by unprecedented drops of demand in excess of 40 % since the COVID-19 outbreak until now so that the impact on the beneficiary is manifest and material. Despite such a dramatic drop in passenger numbers which no industry forecasts or projections (IATA, Eurocontrol etc.) predicted whether in 2017 or shortly before the outbreak of the pandemic, in line with its contractual obligations with the Region, the beneficiary could not reduce its services based on its commercial or financial interests alone. SATA continued to discharge its PSOs and ensure connectivity in the absence of alternative means of transport throughout a period in which the containment measures and reduction of air transport demand in Portugal or abroad related to the COVID-19 pandemic produced and continue producing significant effects. Maintaining passenger transport services between the islands of the Region and to/from other Regions (Madeira and mainland Portugal) with sufficient frequency plays a crucial role in ensuring continuously basic connectivity with Azores, whilst significantly aggravating SATA’s financial situation in the last two years 2020 and 2021 (recitals 34 to 36)

A similar analysis was conducted by the Commission, inter alia, in its Decision of 7 August 2020 in case SA.57675 (2020/N) – Germany - COVID-19 - scheme for regional and local public passenger transport (OJ C 277, 21.8.2020), recitals 18-20, 54-55 and 65-66, where the Commission found that the disruption caused by COVID-19 is clearly outside the normal functioning of the market and has particularly affected public service providers in the transport sector, as [t]hey have not had the choice to reduce their capacity and thereby to reduce their fixed cost, as companies in other sectors. As such, [they] have had to continue to offer almost full capacity despite the still very low number of passengers (recital 66). See also Commission Decision of 3 November 2020, in case SA.58738 (2020/N) – The Netherlands COVID-19 – Support for regional and long-distance public passenger transport (OJ C 397, 20.11.2020), recitals 57-62, as well as Commission Decision of 7 January 2021, in case SA.59747 (2020/N) COVID-19: Damage compensation to operators of rail passenger services that concluded net-cost public service contracts (OJ C 50, 12.2.2021), recitals 58-62 and 67-68.

, well beyond the direct losses stemming from the travel bans imposed by the Portuguese public health authorities.

(255) The relevance of the exception under point 72(c) of the R&R Guidelines must be considered and assessed in the present economic context of the need for restructuring that the COVID-19 pandemic aggravates materially: in this sense, the exceptional and unforeseeable circumstances are not SATA and its owner’s responsibility. The exceptional circumstance of a COVID-19 pandemic and its effects on air transport demand, in general or addressed to SATA, were not foreseen and could not have been foreseen when either of the past capital increases were granted or shortly before the pandemic outbreak, which prompted Portugal to notify the need for urgent rescue and now

restructuring aid necessary to finance a restructuring plan ensuring the return to viability of the beneficiary. Furthermore, the Commission notes that SATA has been operating uncompensated PSOs in terms of frequencies, schedules, prices and routes, which were based on its sole shareholder’s public policy objectives of connectivity of an outermost region of the Union, prevailing over the financial and commercial interest of the beneficiary, in the absence of any expression of interest of competing carriers in discharging similar obligations in the area (recital 21) or operating the routes in question (recital 28). Finally, the Commission does not discern that the capital increases have supported any risky commercial conduct of SATA, or any expansion of its air transport or airport management activities by starting new routes or expanding airport facilities within the internal market to the detriment of competition, in the relevant past period (2017-2020) or during the restructuring period now envisaged.

(256) At the same time, the full reimbursement with interest of the amount of capital unlawfully provided by the ARA reduces any possible moral hazard referred to in the R&R Guidelines to support the rationale of the one time, last time principle. The full reimbursement implies that recurrent restructuring operations supported with supposedly recurrent and ineffective restructuring aid are not incentivised in this or other cases. Moreover, the reimbursement reduces distortions of competition referred to in the R&R Guidelines and that are already limited on the markets where SATA and its controlled subsidiaries are and will remain active at the end of the restructuring plan, namely intra-Azores air transport and small island airports.

(257) On those grounds, the Commission considers that SATA has not received aid in the past that would fall within the scope of the one time, last time principle, and even if the past capital increases now reimbursed amounted to past rescue or restructuring aid, the restructuring aid meets the exception set out in point 72 c) of the R&R Guidelines and, accordingly, does not produce undue negative effects on competition and trade in the internal market.

5.4.3.5.

Measures limiting distortions of competition

(258) As explained in points 87 to 93 of the R&R Guidelines, measures to limit distortions of competition should be set out in proportion to the distortive effects of the aid, and in particular: to (i) the size and the nature of the aid and the conditions and circumstances under which it is granted; (ii) the size and relative importance of the beneficiary in the market and the characteristics of the market concerned, and (iii) the extent to which moral hazard concerns remain following the application of the own contribution and burden sharing measures. Measures to limit distortions of competition should not compromise the prospects of the return to viability, nor should they come at the expense of consumers and competition.

Points 87 to 90 and 92 of the R&R Guidelines.

(259) The structural measures might include divestment of assets, reducing capacity or market presence. They should favour the entry of new competitors, as well as the expansion of existing small competitors or cross-border activity, taking into account the market or markets where the beneficiary will have a significant market position after the restructuring, in particular those with excess capacity. Behavioural measures should ensure that aid finances only the restoration of long-term viability.

(260) As set out above in recital 62, Portugal confirms that SATA will take the following measures limiting distortions of competition, which will apply until the end of the restructuring plan, namely 31 December 2025:

(a) the sale of a majority and controlling stake of SATA Internacional - Azores Airlines, S.A., equal to at least 51 % of the share capital of that company;

(b) the carve-out and sale of the business unit that currently provides ground handling to all airports and airfields in the Region;

(c) a cap on the aircraft fleet not exceeding a maximum of 14 aircraft and, after the sale of Azores Airlines, six aircraft for the remaining perimeter of SATA’s controlled business;

(d) an advertising ban of received State aid, and

(e) an acquisition ban.

Structural measures

(261) Pursuant to point 80 of the R&R Guidelines, measures to limit distortions of competition should not lead to a deterioration in the structure of the market. Structural measures should therefore normally take the form of divestments on a going concern basis of viable stand-alone businesses that, if operated by a suitable purchaser, can compete effectively in the long term.

(262) The Commission has therefore assessed the divestiture measures proposed in order to ensure that they would constitute a viable, stand-alone business able to compete effectively in the relevant markets at the end of the restructuring period and beyond (recital 260).

Divestiture of a controlling stake in Azores Airlines

(263) With regard to the first structural measure that Portugal committed to put in place (recital 260(a) in combination with 260(c)), the Commission notes from the outset that SATA Air Açores is a relatively small regional airline, whose business essentially revolves around the provision of PSO routes to and from the Region of the Azores. Similarly, Azores Airlines is also a small airline, with a limited number of flights concentrated towards the USA and Canada, combined with a limited number of PSOs (on four routes, under the main case base scenario, or none, under the alternative scenario where it would not be awarded the PSO contracts), and a limited number of charter flights and cargo services. The divestiture of Azores Airlines would therefore constitute an important divestment of assets for SATA.

(264) The Commission also notes that: (i) while Azores Airlines has indeed been loss-making for a number of years, that was to a considerable degree due to its old fleet and due to a lack of compensation of the PSO services, which it operated between the mainland and the Azorean destinations; and (ii) as the restructuring plan shows, the bulk of the restructuring measures are adopted precisely in order to bring Azores Airlines on a path to long-term profitability. As assessed in detail in section 2.3.1, such measures are well suited to addressing the causes of difficulty, and are credible and appropriately calibrated to ensure long-term viability.

(265) Furthermore, in compliance with point 78 of the R&R Guidelines, the ARA will divest the controlling stake in Azores Airlines by the end of 2025 at the latest, by when Azores Airlines would achieve a normalised/recurrent EBITDA of around EUR […] million, sufficient as to consider the business profitable. Under the restructuring plan, Azores Airlines is expected to […] , becoming profitable […] , with revenues expected to reach around EUR […] million by 2025, a fleet of eight jets ( […] ) and an EBIT of EUR […] million by 2025, resulting in approximately […] % EBIT margin, aligned with industry benchmarks (between 8-12 % on average for the peer group). In addition, […] .

(266) The Commission considers that the alternative solutions presented by Portugal in which PSO might not be awarded to Azores Airlines in the future are credible, and that a potential failure to obtain such contracts after the expiration of the current agreements in place would not jeopardise the viability of the airline after its divestiture.

(267) As described (recitals 24 to 26), Azores Airlines already operates few commercial flights, notably to North America (Boston, Oakland, Toronto and Montreal), in addition to the four PSO routes, as well as charter and cargo services. Therefore, in terms of market presence, even if on the overall Portuguese air transport market, SATA is far behind the biggest service provider, (the TAP group), it has the strongest market presence in the routes to/from the Azores

Autoridade Nacional da Aviação Civil (ANAC) – Trimestral statistical Bulletin no 49, JAN-MAR 21

. In 2020, Azores Airlines had a share of [35-45] % of the passengers arriving to the Azores, whereas in terms of air cargo services Azores Airlines represented more than [60-70] % of air cargo from or to outside the Azores

Source: SREA and company data.

. Therefore, competitors could take the opportunity to replace SATA in a position of relative importance as far as such regional routes are concerned.

(268) Even if […] , the Commission considers that the planned measures allow competitors to step in the market where SATA, post-restructuring, will still be present, although mainly with PSO and SGEI activities and a very reduced fleet of six aircraft, as ensured by the measure under recital 260(c). Hence, by acquiring control of the subsidiary, SATA’s competitors might decide to partly replace or complement Azores Airlines’ PSO routes by offering connections to mainland Portugal and Madeira on a commercial basis, as well as to grow on other international flights or niche tourist routes and charter services.

(269) Finally, in view of (i) the corporate re-organisation undertaken by SATA, whereby its operating companies will be clearly separated among themselves and put under the control of a holding company, (ii) the restructuring of Azores Airlines’ activities on a more efficient basis, including the possible remuneration of PSO operations or the discontinuance of loss-making PSOs and, possibly, diversification towards new and viable activities, as well as (iii) the revised timeline for the divestiture, to be carried out within the restructuring period, the Commission no longer has doubts on the effectiveness of the divestment in addressing difficulties caused by possibly conflicting interests of Azores Airlines’ shareholders (recital 75).

Divestiture of the new ground handling unit

(270) Second, with regard to the measure referred to in recital 260(b), it concerns a second, smaller divestiture, namely of the new ground handling unit, which is vertically related to the main operations of the SATA airlines. This divestiture would occur in […], adding on the package of the structural measures, at a time which would allow the beneficiary to achieve recurrent EBITDA of around EUR […] million/year for this ground handling business. In addition, the projections for the new ground-handling unit show a positive EBIT as of […] onwards (see table 1.A). Therefore, post-restructuring, it is expected that this new ground handling businesses would also consist of viable and stand-alone businesses.

Conclusions on the structural measures

(271) The Commission notes that the restructuring aid to SATA under Article 107(3), point (c), TFEU is planned to be granted in circumstances of a serious economic disturbance of the economy of the Member States of the Union referred to in Article 107(3), point (b), TFEU. The economic effects of the COVID-19 pandemic since March 2020 have been particularly acute on supply and demand for air transport and tourism services

Points 1 to 4 of the Temporary Framework.

. In addition, the restructuring aid is provided to an operator located in an assisted area with an aim to ensure that SATA, currently in charge of PSOs and SGEIs to the Azorean community, continues to guarantee the territorial continuity of the Region of Azores both internally and with the mainland and Madeira, as well as with other Member States.

(272) In this respect, SATA is a small regional airline, with negative operating results already before the COVID-19 pandemic and made more fragile by the latter, (section 2.3.1.4). The business being divested, namely Azores Airlines and ground handling operations, accounts at present for [50-60] % of the revenues of the beneficiary. At the end of the restructuring period, by when the divestment must be completed the proportion of revenues is projected to amount to […] % (or […] ). Given its current financial situation, the Commission thus considers that SATA cannot withstand further divestments or further withdrawals of capacity without impairing the return to viability.

(273) Furthermore, the planned divestments seem adequate to counterbalance SATA’s limited own contribution to the restructuring costs, which is exceptionally accepted in the present case, as explained in recitals 231 to 236, on the grounds of:

the relatively small size and the specific circumstances of the beneficiary, entirely owned by the Region of Azores;

the socio-economic difficulties - in particular, in terms of raising new market financing - of such outermost Region, which is also an assisted area of the Union, and

the fact that these difficulties have been exacerbated by the COVID-19 crisis, given that the economy of the Azores is heavily dependent on tourism.

Behavioural measures

(274) With the cap on the fleet size (recital 260(c)), SATA will meaningfully reduce by 7 % the size of its aircraft fleet compared to the situation in 2019, before the restructuring period. This reduction eases possible excess supply on the Portuguese air travel market where it will remain active, to an extent which is appropriate in light of its relatively limited position therein. In effect, with a reduced and capped aircraft fleet, SATA would be in a position to serve customers and withstand competition from airlines not subject to similar limitations only if it can use the aircraft more efficiently, with higher load factors and with a higher frequency.

(275) SATA will be further limited regarding growth through external acquisitions of competitors or suppliers of products or services complementary to its own until the end of the restructuring plan, unless indispensable to ensure its long-term viability (recital 260(e)). In that case, Portugal will have to notify the planned acquisition to the Commission, substantiate the purported indispensability of it and refrain from implementing the acquisition until the Commission confirm that the acquisition is necessary to support the long-term viability of SATA.

(276) Furthermore, SATA will also refrain from publicising State support as a competitive advantage when marketing products and services above (recital 260(d)).

Conclusion on the measures to limit the distortion of competition

(277) In line with point 83 of the R&R Guidelines, those measures will ensure that aid is used only to finance the restoration of long-term viability and that it is not abused to prolong serious and persistent market structure distortions or to shield the beneficiary from healthy competition.

(278) Therefore, the Commission considers that the measures to limit the restrictions of competition appropriately reduce the negative effects of the restructuring aid.

5.4.3.6.

Transparency

(279) According to point 38(g) of the R&R Guidelines, Member States, the Commission, economic operators and the public must have easy access to all relevant acts and pertinent information about the aid awarded. Hence, in keeping with point 96 of the R&R Guidelines, the Portuguese authorities undertake to meet transparency requirements and make the relevant information available on the following website:

https://www.portaldiplomatico.mne.gov.pt/sobre-nos/gestao-e-transparencia/documentos-legais

1. CONCLUSION ON COMPATIBILITY

(280) Pursuant to Article 9(6) of Regulation (EU) 2015/1589, decisions closing the formal investigation procedure are to be taken as soon as the doubts raised on the compatibility with the internal market of a notified measure have been removed.

(281) In light of the above, the Commission concludes that, whilst the doubts it raised in the opening decision have been removed, the negative effects of the restructuring aid on the air transport sector are limited, given the small size of SATA, as well as the measures limiting the distortions of competition, which Portugal should ensure are implemented. Consequently, provided that Portugal ensures the implementation of the restructuring plan, the positive effects of the restructuring aid on the development of the economic activity - concerning the air transport ensuring connectivity of the Region of the Azores, as well as related activities benefitting therefrom - outweighs the potential negative effects on competition and trade, which are therefore not adversely affect to an extent contrary to the common interest. The commitments provided by Portugal should be laid down, therefore, as conditions for the compatibility of the aid.

(282) In its overall assessment, therefore, the Commission concludes that the restructuring aid complies with Article 107(3), point (c), TFEU as it facilitates the development of the regional air transport and related activities, especially in the tourism sector, in the Azores and does not distort competition to an extent contrary to the common interest.

(283) Finally, the Commission recalls the obligation of Portugal to see to it that the beneficiary fully implements the restructuring plan

Point 122 of the R&R Guidelines.

, as well as to provide regular reports on the implementation of the restructuring plan every six months until the end of the restructuring period. Those reports should specify, in particular, the dates of disbursement of the funding committed by Portugal and of the own contribution of the beneficiary, the developments as regards the aircraft and capacity of SATA’s fleet, any deviations from the financial or operational trajectories of the restructuring plan in terms of revenues, containment of cost and cost reductions from the restructuring measures and earnings, and the corrective measures envisaged or taken by Portugal or the beneficiary where appropriate.

(284) With respect to the rescue aid, the Commission notes that Portugal withdrew its notification of that aid and that the rescue aid has not been granted. As a result, the formal investigation procedure with regard to the rescue aid has become without object (recital 136).

(285) With respect to the past capital increases, the Commission considers that they represent an unlawful aid and that such aid is not compatible with the internal market (recital 245). However, since Portugal has recovered the corresponding amount with interest, the Commission concludes that it can close the investigation in respect of the past capital increases without ordering their recovery,

HAS ADOPTED THIS DECISION:

Article 1

The restructuring aid that the Portugal is planning to implement for the benefit of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A. and all its controlled subsidiaries, in the form of equity measures amounting to EUR 318,25 million and a guarantee on loans amounting to EUR 135 million, is compatible with the internal market within the meaning of Article 107(3), point (c), of the Treaty on the Functioning of the European Union (TFEU), subject to the conditions set out in Article 2 of this Decision.

Article 2

1. Portugal shall ensure that SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A., and/or its subsidiaries as appropriate, fully implement, within the relevant timelines, the measures included in the restructuring plan set out in this Decision.

1. Portugal shall ensure that SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A., and/or its subsidiaries as appropriate, fully implement, within the relevant timelines and at the latest before the end of the restructuring period on 31 December 2025, the measures limiting the distortions of competition as described in this Decision, namely:

(a) fully divesting at least 51 % of the share capital of SATA Internacional - Azores Airlines, S.A.,

(b) fully divesting the business unit that currently provides ground handling services to the airports and airfields in the Region of the Azores under the sole control of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A.;

(c) respecting a cap on the aircraft fleet under the control of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A. not exceeding a maximum of 14 aircraft and, after the sale of the shares in SATA Internacional - Azores Airlines, S.A., referred to in point (a), six aircraft;

(d) refraining from acquiring shares in any company except where indispensable to ensure the long-term viability of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A., and/or its subsidiaries as appropriate, and, in that case subject to the Commission’s prior approval; and

(e) refraining from publicising State support as a competitive advantage when marketing products and services of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A., and/or its subsidiaries.

1. Portugal shall send the Commission regular reports on the implementation of the restructuring plan every six months starting from the date of adoption of this Decision until the end of the restructuring period on 31 December 2025. Those reports shall specify, in particular: the dates of the actual disbursement of the funding committed by Portugal and the own contribution of the beneficiary; the developments on the network, market position, aircraft and capacity of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A.’s fleet; any deviations from the financial or operational trajectories of the restructuring plan in terms of revenues, containment of costs and cost reductions, and earnings achieved by the restructuring measures; and any corrective measures envisaged or taken by Portugal or the beneficiary where appropriate.

Article 3

The formal investigation procedure is closed with regard to the State aid in the form of a public guarantee to a bank loan of EUR 169 million for the rescue of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A. on the grounds that the procedure has become without object, since Portugal has withdrawn the notification of that State aid without putting the aid into effect.

Article 4

1. The three capital increases of SATA Air Açores - Sociedade Açoriana de Transportes Aéreos S.A. subscribed by the Portugal since 2017 for a total amount of EUR 72,6 million constitute State aid within the meaning of Article 107(1) TFEU.

1. That State aid was unlawfully put into effect by Portugal in breach of Article 108(3) TFEU and is incompatible with the internal market.

1. Since Portugal has already recovered the incompatible State aid from the beneficiary with interest from the date on which the three capital increases were respectively put at the disposal of the beneficiary until their actual recovery, the Commission has no grounds to require the recovery of the aid.

Article 5

Portugal shall inform the Commission, within two months of notification of this Decision, of the measures taken and envisaged to be taken to comply with it.

Article 6

This Decision is addressed to the Portuguese Republic.

Done at Brussels, 7 June 2022.

For the Commission

Margrethe Vestager

Member of the Commission