The European Commission (EC) has given Portugal one month to respond to its preliminary findings that the proposed EUR3.2 billion euros (USD3.7 billion) state-funded restructuring of TAP Air Portugal (TP, Lisbon) does not meet European Union (EU) market compatibility conditions.

On July 30, the EC published a non-confidential version of a decision taken on July 16 to open an in-depth investigation into the compliance of Portugal’s proposed restructuring plan for TAP, as well as the compliance of the proposed state support with Brussels’ guidelines on rescue and restructuring aid.

“The investigation is ongoing. We cannot prejudge its timing or outcome,” an EC spokesperson informed ch-aviation. “The opening of an in-depth investigation gives the member state and other interested parties an opportunity to submit comments. It does not in any way prejudge the outcome of the investigation. In the case at hand, in line with standard procedures, Portugal has one month from the date of receipt of the decision (not the date of the publication of the non-confidential version) to submit comments and provide information,” the EC said.

As previously reported, the restructuring plan of TAP and subsidiary Portugália Airlines (NI, Lisbon) foresees fleet reduction and network streamlining before 2023. In parallel, TAP would renegotiate terms with suppliers and lessors and reduce staff costs. Portugal plans to finance the restructuring through EUR2.73 billion (USD3.2 billion) of equity and quasi-equity measures, which would include a EUR1.2 billion (USD1.4 billion) rescue loan to be converted into equity. Additional support of EUR512 million, (USD602 million) in the form of a state guarantee to bank loans, would be granted from 2022, in case TAP could not access the financial markets in 2023-2025, as was currently expected.

Brussels particularly scrutinised whether TAP would sufficiently contribute to the restructuring costs, thus ensuring the restructuring plan would not unduly relie on public funding and that therefore the aid would be proportionate; and whether appropriate measures to limit the distortions of competition would accompany the restructuring.

In its preliminary conclusions - referred to as “Letter to the Member State” on its website - the Commission expressed doubt that Portugal's proposed divestitures of loss-making activities would mitigate the state support's impact on free competition. It also had doubts whether the restructuring aid would be proportional as TAP would only contribute 36% of the overall restructuring costs.

"By granting access to funding at conditions which it would not otherwise obtain on the market, the public funding is liable to improve the position of the beneficiary in relation to actual competing undertakings or potential ones, that have not access to similar state support from Portugal or that have to finance operations at market conditions. The capital increase and the guarantee on loans consequently distort or threaten to distort competition," the Commission noted.

It also recommended that the restructuring plan be tested on its assumptions and various scenarios, such as the potential return to long term viability, or potential further reliance on the Fiscus in future. "Projections are fraught with several uncertainties, the most significant being the evolution of the demand by the end of 2025 in very stressed scenarios, that would require more aid," it said.

However, the Commission also acknowledged that "at least half of the subscribed share capital of the beneficiary has disappeared and thus it qualifies as an undertaking in difficulty". "On the basis of the information provided by the Portuguese authorities, the Commission finds that there is indeed a concrete risk of an immediate failure of the beneficiary to meet its payment obligations leading to a disruption of the ongoing air transport activity of TAP Air Portugal."

It also acknowledged that TAP was a major provider of connectivity for passengers of the lusophone diaspora, in particular for Portugal and Europe's connectivity with Brazil, Angola, Mozambique, and São Tome. "The most prominent competitors of TAP (Ryanair (FR, Dublin International) and easyJet (London Luton)) provide connectivity between Portugal and other member states only and their business model excludes long-haul intercontinental flights," it noted. In addition, it agreed that TAP played a key role in the Portuguese economy and accounted for more than 110, 000 indirect jobs.