Airline funding was not illegal, Nicosia argues

NICOSIA (Reuters) – Cyprus said yesterday it did not think a restructuring plan for Cyprus Airways broke EU state aid rules, but would cooperate with an inquiry into a bailout scheme for the ailing carrier. The European Commission said on Wednesday it was launching an investigation into the plan, expressing doubts whether proposals to revamp the airline were consistent with EU rules that limit state aid to prevent distortions of competition. «We do not believe there is any state support,» said Communications Minister Haris Thrassou. Authorities were awaiting the written observations of the Commission, and then Cyprus would have a month to respond, he said. «We had expected this, it is part of the process… we would be worried though if they were not satisfied with our explanations.» Failure to provide a satisfactory answer could lead to the Commission blocking the restructuring plan. The company, 70 percent state-controlled, is in the process of shedding around a fifth of its 1,800-strong work force through a voluntary redundancy scheme. Judging by Thrassou’s comments, the reservations of the Commission appeared to be related to how the airline would meet the cost of the redundancies, along with the government’s plans to spin off a charter subsidiary of the group into a separate entity, then pay for it. Thrassou said a 10- to 11-million-pound (17.6- to 19.5-million-euro) contribution into a fund for redundancies should not be regarded as a government handout. «It is to boost the redundancy fund, which is not going to the company but to departing staff,» he said. In May 2005, the Commission approved a 51-million-euro government-backed loan as rescue aid to help the carrier. In return, Cyprus was required to submit a restructuring plan for the carrier, which posted a pretax loss of 25.03 million pounds in 2005. That plan included a further 96-million-euro long-term government-backed loan, a reduction in the airline’s work force, a capital increase and the sale of Cyprus Airways’ charter unit. The government has said it would acquire the unit, Eurocypria, to create a second debt-free scheduled carrier. The company’s value would be calculated by external consultants, Thrassou said.