Estonia’s government is not sufficiently capable of acting as the owner of complex aviation businesses, the country’s national auditor has concluded after a review of regional operator Nordica’s business.
The national audit office, Riigikontroll, says the government is too indecisive, adding that a sale of Nordica and the associated aircraft lessor Transpordi Varahaldus would be a “reasonable” course of action.
Both companies emerged in 2015 as the government sought to establish a successor to collapsed flag-carrier Estonian Air, and Nordica – originally Nordic Aviation Group – started flying in early 2016.
Riigikontroll’s review sought to determine whether the carrier and lessor had succeeded in achieving targets over their seven years of operation, and whether the government’s continued ownership was justified.
But it has found neither company is “strategically necessary” for the state and there is “no understandable public interest” in owing them.
“The dream of flying under one’s own flag might not be possible in the tight competition of the aviation market without continuous financial support from the state – and without violating the European Union rules for granting state aid,” says auditor general Janar Holm.
Estonia’s government invested €72.7 million ($77.5 million) to set up the two companies in order to ensure air transport continuity.
But the state-driven strategy of operating from Tallinn proved an “economic dead-end”, says the auditor.
The airline’s management had sought other avenues of income to cover the losses of flying from Tallinn, including wet-leasing aircraft to other carriers, and repeatedly informed the supervisory board of the difficulties of meeting the owner’s expectations.
Nordica had been allocated €40.7 million of the government’s funding but, by the end of its first year in 2016, it had generated a €15 million loss and just €3.2 million of the funding remained.
Exacerbating the airline’s problems was the failure of Slovenian flag-carrier Adria Airways, with which it had a co-operation agreement. This led to a €4.6 million write-off.
“There were attempts to stop unprofitable flights from Tallinn, but the necessary agreements were not reached at the owner level,” says the auditor.
Neither the supervisory board nor the Estonian economic affairs ministry acceded to requests to reconsider the strategy. Nordica effectively ran out of government funds in autumn 2018, but the Tallinn flights continued until economic pressure forced their closure a year later.
While the onset of the pandemic in early 2020 wrecked the global air transport market, the auditor says the crisis might actually have prevented Nordica’s bankruptcy because it presented a “clearer justification” to seek more funding from the government.
The government eventually agreed a €30 million package in October 2020, comprising a €22 million injection and access to an €8 million loan – although this faced opposition, with the finance ministry pointing out that the company’s five-year losses had totalled €22.3 million rather than the forecast €2.5 million.
“It is not possible to assess in retrospect whether, freed from unprofitable flights from Tallinn, Nordica would have started to do well [had the pandemic] not been triggered,” says the auditor.
Over the course of August 2019 to July 2021, two different finance ministers asked the government four times to consider whether ownership of Nordica was justified.
“No visible actions followed these appeals,” the auditor adds.
Holm says Nordica’s situation demonstrates how time and resources can be lost when a politically-driven aim fails to adapt to changing reality, and why the state should not govern a company it owns.
“We can see that Nordica has increasingly moved away from its original goal – to ensure air service for Estonia,” he states. “This goal has not been achievable.”
The auditor says Nordica barely made a profit in 2021 and 2022, and the company’s economic situation has “deteriorated sharply” since May this year. Efforts are underway to stabilise the company, including a change of management.
It states that, once this stablisation is achieved, the government should decide on the best direction for selling the aviation businesses – privatising Nordica and Transpordi Varahaldus together, or separately, either partially or in full.
If the government continues to retain ownership of the companies, the auditor adds, it should clearly define why they are strategically necessary and which public interest functions they fulfil.
Nordica, which includes a subsidiary Xfly, operates a fleet of around 20 aircraft – including Bombardier CRJs, ATR 72s and Airbus A320s – for wet-lease activities.
