Watchdog discloses Serbia-Etihad investment

State Aid regulator reveals aspects of Air Serbia investment

The Serbian Commission for Control of State Aid has disclosed parts of the investment deal the Serbian government and Etihad Airways made in the restructuring of Jat Airways and its transition into Air Serbia, which has up until recently been hidden from the public domain and marked as confidential. The Commission, which had to approve whether the Serbian government’s contribution to the deal is in line with state regulations, found on February 21, 2014 that its financial involvement in Etihad’s minority takeover of Jat Airways (now Air Serbia) fully conforms to state aid policies. However, the Commission’s decision gives insight into some of the government’s obligations as part of the transaction which has been of great interest to the public, primarily due to the secretive nature of the agreement. On August 1, 2013, the Serbian government, Jat Airways and Etihad Airways entered into a series of agreements related to Jat. In total, five agreements were made - Transaction Framework Agreement, Support Services Agreement, Investment Agreement, Consulting Services Agreement and Shareholders’ Agreement. The agreements, which have not been disclosed to the public, envisage wide ranging cooperation between Serbia and Etihad related to the running of Air Serbia. Most importantly, the transaction includes significant financial support to Air Serbia by the Serbian government entitled “aid for the restructuring of Jat Airways”.

According to an analysis of the Commission’s findings by “Lexology”, which specialises in global company law cases, plans drafted between the Serbian government and Etihad Airways will see the financial burden of restructuring Air Serbia, or Jat as it is referred to in the agreement, shared by the Serbian government and Etihad. In addition, Air Serbia will partly contribute to the restructuring costs with its own resources. On its part, the Serbian government assumed all liabilities which relate to Air Serbia’s operations until the end of 2013. These included loans taken out by the company, accrued liabilities to suppliers, deferred tax liabilities, unpaid salaries and redundancy expenses. The government also issued a guarantee for a short term shareholder loan which Etihad provided to Air Serbia for the financing of the carrier’s ongoing operations. Furthermore, together with Etihad, the government co-financed several shareholder loans for the improvement of specific segments of Air Serbia’s operations (such as line and light maintenance, catering and ground services). Finally, in order to cover the shortage of cash needed for the financing of Air Serbia’s operations, the Serbian government provided funds to the carrier either through direct subsidies or by decreasing Air Serbia’s cash operating costs. Apart from receiving assistance from the government and Etihad, the plan asserts that Air Serbia will partly contribute to financing the restructuring through its own resources. Specifically, the carrier will generate funds by leasing out some of its aircraft and selling a part of its assets (such as old aircraft and property).

On the other hand, Etihad will provide assistance to Air Serbia in the form of shareholder loans for financing the carrier’s ongoing operations and the improvement of certain segments of its business. In addition, it will provide various services to Air Serbia related to marketing, yield management, establishment of a call center, rebranding of its webpage and human resources (most of which it has already done). According to the Commission, it is also claimed that Etihad will further enable savings in Air Serbia’s procurements by using Etihad’s bargaining power towards suppliers (such as for the lease and purchase of aircraft). Finally, the plan promises that Etihad’s relationship with Airbus will enable Air Serbia to use the advance payment which Jat made to the aircraft manufacturer in 1998 for the purchase of eight new A319s. The latter has also been resolved as the controversial Airbus order was annulled and Etihad transferred part of its Airbus A320neo order to Air Serbia.

The published version of the Commission’s decision does not reveal the total amount of aid the Serbian government and Etihad will provide to Air Serbia based on the restructuring plan. However, the decision does disclose that the government will contribute to the total costs of restructuring by 46%, while the remaining 54% of the costs will be covered by Etihad, as well as through Air Serbia’s own resources. The plan claims the restructuring aid is justified since shutting down Serbia’s national carrier, an alternative to striking a deal with Etihad, would have had significant negative effects on the Serbian economy as a whole. It is also stated that Air Serbia’s total contribution to the country’s GDP exceeds 700 million US dollars and that its business is tied to approximately 21.000 jobs in Serbia. Furthermore, it is said that the loss of the national carrier would have had adverse effects on exports and tourism, as well as business sustainability of the country’s airports.

The decision made by the Serbian Commission for Control of State Aid has been made public by the regulator and can be found here (PDF document, in Serbian).