Iberia Airlines funding likely to stir trouble

Date: 07/12/1995

By Tim Jones

THE European Commission looks set to please nobody in the clearance of Spanish state aid to Iberia Airlines.

With as much as 470 million ecu in subsidies expected to be granted, the Commission faces a legal challenge for failing to stick to a pledge made in 1992 that Iberia could receive no further aid before the end of 1996.

This latest aid clearance, which will bring the subsidies for national European airlines up to 6 billion ecu over the past two years, is likely to prompt a rash of complaints and legal challenges from those who oppose it.

For them, the case is black and white. In July 1992, Iberia received 750 million ecu to accompany a restructuring of the company in 1992-96 and promised to seek no more during this programme.

But the plan failed to turn Iberia around. From 1991-94, Iberia began an aggressive acquisition programme in Latin America, investing 875 million ecu in Chilean, Argentinian and Venezualan carriers.

Losses on some of these routes, compounded by the onset of a recession in Europe, the devaluation of the peseta and the emergence of private competition, all deepened the company's crisis.

While Iberia is now making a profit on current operations - 198 million ecu in the first 10 months of the year - the burden of accumulated debt translates this into a loss of 56 million ecu. The firm is struggling to meet repayments on its debts.

In December last year, Iberia won the agreement of the labour unions to cut wages by 8.3&percent; and shed 3,500 jobs by 1998 in return for a further injection of state aid of 810 million ecu.

After months of negotiations, Transport Commissioner Kinnock made it clear he would only allow 250 million ecu of the aid package as long as it was used solely to pay for job losses. Any attempt to write off debt or subsidise operations would be blocked.

Realising the Commission would refuse the full aid package, the government encouraged the sale of part of Iberia's 85&percent; stake in Aerolineas Argentinas to a consortium including Spain's state holding company Teneo.

The proceeds of this sale are likely to make up the difference between the cleared aid and Iberia's capital needs.