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Wednesday, 17 October, 2001, 16:22 GMT 17:22 UK
Sabena rescue gets EU blessing
Sabena desk at airport
Sabena: The way is now clear for "special assistance"
Belgium's national airline, Sabena, has received Brussels' blessing for a multi-million euro rescue loan.

Because the package, worth 125m euros ($113m; 78m), is a bridging loan rather than a grant, the European Commission allowed it through on a unanimous vote.

The key to the approval, according to EU transport commissioner Loyola de Palacio, is that the loan is designed to give the airline a breathing space to restructure itself despite the ongoing cashflow crunch triggered by the aviation slowdown.

However, Europe's biggest budget airline Ryanair has said it will now start legal action to block the loan.

"My initial reaction is 'what a waste of money'," Ryanair's chief executive Michael O'Leary said.

"We will now issue proceedings, legal proceedings, to block it but I think Sabena will be bankrupt long before our legal proceedings get to court."

Caught in the courts

Analysts said legal action challenging state aid has been ineffectual in the past because of the slow speed of the court process.

"All we are doing is providing market rate funding to enable the company to have the necessary cashflow so that it can keep going until it decides what to do," said Ms de Palacio.

Sabena is under insolvency protection, and facing "possible short term economic death", Ms de Palacio said.

Sabena may find a saviour in Virgin Express, a Brussels-based low-cost airline, which has expressed interest in buying parts of the troubled airline.

The two companies already have a code sharing agreement which means Virgin Express relies on Sabena for some business.

Observers believe Virgin may want to take over some of Sabena's routes along with take off and landing slots at airports.

Kevin O'Toole of the industry paper, Airline Business, told the BBC's World Business Report that he believes the European Commission is determined to keep strictly to the timeframe it has set out.

"They have been talking very tough about not allowing this just to creep into some open-ended state aid," he said.

Rough ride for Swissair

Sabena's predicament was triggered by the collapse of Swissair, its co-owner, which reneged on a $136m euro injection into the Belgian airline.

The reconstruction of the Swiss company, which is rolling its viable operations into its regional subsidiary Crossair, is now likely to be funded by the government.

The Swiss government said on Wednesday that it was prepared to fund the so-called "Operation Phoenix", a 4bn Swiss franc (Sfr) ($2.5bn; 1.69bn) plan to rescue the failed airline.

What is still not certain is what form assistance will take, since many in the country are unwilling to go beyond 1.5bn Sfr in tax cuts.

Is Sabena the exception?

In any case, the Italian, French and Irish governments are still looking for ways to help out their own flag carriers without breaching European rules forbidding direct state aid.

That task has become more difficult since the EC declined to loosen significantly regulations governing state support for firms, banning financial aid except to cover losses immediately following last month's terror attacks.

The ruling ignored the pleas of governments across Europe that the region's aviation industry should get as generous a handout as its US rivals.

Case by case

In one small loosening of policy, Ms de Palacio told EU transport ministers that aid would be considered on a case-by-case basis.

The commission previously said that only damage incurred on the day of the attack, 11 September, and three days afterwards, could be considered eligible for state aid.

Now it has conceded that if the US and Israeli aviation shutdowns had effects beyond that date, more compensation could be considered.

"If we try to broaden this mechanism, we would be getting into a whole new ball game," Ms de Palacio said.

"Once you open that door you don't know where it will lead."

The airline industry will not be allowed to collapse, she promised, but support must be offered "in a way that does not distort competition".

US aid

Ms de Palacio did permit a relaxation of so-called "use it or lose it" regulations on landing slots at airports.

And she allowed governments to pick up the tab for heightened security, and extra insurance costs, until the end of this year.

She also promised to consult with her US counterpart, Norman Mineta, to work out a code of conduct covering state aid.

EU airlines accuse US rivals of using the $15bn package of aid they have received to slash fares.

"Price dumping is already taking place," said Belgium's transport minister, Isabelle Durant.

The BBC's Alison Gee
"Ryanair has been heavily critical of the Belgian government's loan to Sabena"
Kevin O'Toole, Airline Business
"They have got another few months but it is not an open ended remit"
The BBC's Mike Sergeant
"Sabena is one of the most vulnerable airlines in Europe"
See also:

17 Oct 01 | Business
Europe says no to airline aid
15 Oct 01 | Business
France offers state aid to airlines
12 Oct 01 | Business
Airlines ask EU for more aid
10 Oct 01 | Business
Full EU statement on airline aid
04 Oct 01 | Business
EU complains over Swissair aid
23 Sep 01 | Business
Airlines receive $15bn aid boost
12 Oct 01 | Business
Round-up: Aviation in crisis
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