LOT Polish Airlines gets governmental aid package of PLN 2.9 billion (EUR 640 million)

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LOT’s 7th Boeing 787 Dreamliner SP-LRG

In the face of the biggest crisis in the history of the aviation industry, the European Commission and the Council of Ministers of the Republic of Poland have approved an aid package for LOT amounting to PLN 2.9 billion. It consists of a PLN 1.8 billion loan and a PLN 1.1 billion of capital injection. Such financing of LOT was possible due to the good condition of the company before the pandemic.

LOT undertook to repay the major part of the aid amount together with subsidised interest rates, to the Polish Development Fund, which provided financing. Optimisation of the carrier’s operations, reduction of leasing costs and the strategy implemented by LOT in recent years have resulted in a significant increase in profitability and the number of passengers carried. Therefore, even in such a serious crisis within the industry, the company can use repayable financing, which will be returned within six years from the profits generated.

The main cost of the airlines’ operations are the lease payments for aircraft, which are paid to foreign financial institutions. Due to the crisis, we have negotiated a significant reduction so that we can apply for state aid and then work out its repayment as soon as possible – says Rafał Milczarski, CEO of LOT. The airline is a driver for the economy, tourism and a guarantee of the country’s logistical security. Before the pandemic, we had been growing year on year in almost every category and generated record profits. We know how to get back on the path of intensive growth and we will do so – added Rafał Milczarski.

As a result of the pandemic, since mid-March 2020, passenger air traffic throughout Europe has been suspended for almost 3 months, which means billions in losses for each air carrier. The situation was even worse because of the exceptionally bad summer season and the restrictions imposed by European countries at the beginning of autumn. According to IATA forecasts, the aviation industry worldwide net loss will be USD 118 billion in 2020 and USD 38 billion in 2021. Global air traffic has decreased by 66% and it will take several years to recover. That is why the leading European carriers have asked for public aid, otherwise, air traffic would disappear for years. LOT is the next airline in Europe to receive government aid as a result of the pandemic. The airlines operating in our region have received multi-billion support from their governments, some of them even up to the equivalent of PLN 50 billion.

Before the pandemic, LOT was a profitable company, generating profits every year. Since 2016, LOT has doubled its scale of operations, expanded its fleet from 45 to 80 aircraft and launched 80 new routes. In 2019, LOT carried a record 10 million passengers onboard its aircraft. In 2020, LOT planned to launch long-haul flights to Washington and San Francisco and to carry around 12 million passengers.

The fast growth of LOT and the entire aviation sector is of great importance to the Polish economy and labour market. According to the TOR report, LOT contributes to the creation of about 63.7 thousand jobs and about 0.56% of the national GDP (about PLN 12 billion per year), while the entire aviation sector generates about 242 thousand jobs and 2.4% of GDP in Poland.

Warsaw, December 22nd, 2020

State aid: Commission approves €650 million Polish support to LOT in context of coronavirus outbreak

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

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

The Polish measures

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

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

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

  • a €400 million (approximately PLN 1.8 billion) subsidised loan; and
  • a capital injection of €250 million (approximately PLN 1.1 billion), through the subscription of newly issued shares taken up by Poland.

The Commission found that the measures notified by Poland are in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework. In particular:

  • The subsidised loan: will be granted before 30 June 2021 and will last for maximum six years. The loan will not exceed 25% of LOT’s turnover in 2019, and will cover investment and working capital needs of the company. The applicable interest rate will ensure minimum remuneration, in line with the conditions of the Temporary Framework.
  • The recapitalization aid:
    • Conditions on the necessity, appropriateness and size of the capital injection: the capital injection will not exceed the minimum needed to ensure the viability of LOT and will not go beyond restoring its capital position before the coronavirus.
    • Conditions on the State’s entry, remuneration and incentives to exit from the capital of the company: the recapitalisation aid will prevent insolvency of LOT, which would have serious consequences on Polish employment, connectivity and foreign trade. Poland will receive appropriate remuneration for the investment, and there are additional mechanisms to incentivise LOT to redeem the State’s equity participation obtained as a result of the recapitalisation. Poland submitted a business plan prepared by LOT to redeem the recapitalisation instruments. Poland also committed to preparing an exit strategy within 12 months after the granting of the aid, unless the State’s intervention is reduced below the level of 25% of equity by then. If seven years after receiving the recapitalisation aid the State’s intervention is not reduced below 15% of LOT’s overall equity, a restructuring plan for LOT will be notified to the Commission.
    • Conditions regarding governance: until the State has exited in full, LOT and its subsidiaries will be subject to bans on dividends and share buybacks other than in relation to the State. Moreover, until at least 75% of the recapitalisation is redeemed, a strict limitation of the remuneration of the management of LOT and its subsidiaries, including a ban on bonus payments, will apply. These conditions aim at incentivising an exit of the State as soon as the economic situation allows.
    • Prohibition of cross-subsidisation and acquisition ban: to ensure that LOT does not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, it cannot use the aid to support economic activities of integrated companies that were in economic difficulties already on 31 December 2019. Moreover, until at least 75% of the recapitalisation is redeemed, LOT and all companies controlled by LOT will be prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
    • Public transparency and reporting: LOT will have to publish information on the use of the aid received, including on how its use supports the company’s activities in line with EU and national obligations linked to the green and digital transformations.

The Commission concluded that the measures aim at restoring the balance sheet position and liquidity of LOT in the exceptional situation caused by the coronavirus pandemic. Since the recapitalization does not exceed €250 million, no further commitments to ensure effective competition are required. The measures are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework.

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

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