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Estonian carrier Nordica's poor financial condition shows the Estonian state's lack of skill and interest in its role as owner of a company in such a complex business field as the aviation industry, as per the Estonian National Audit Office.
The initiation of the special audit is motivated by the current situation, where Nordica`s financial performance has turned strongly negative in a very short period of time.
The results of an ongoing special audit suggest that it would be reasonable for the Estonian state to sell both Nordica and Transpordi Varahaldus.
According to the Estonian National Audit Office, even before the serious financial difficulties faced by Nordica became apparent in July, reasons to justify the company and -Aviation assets managers OÜ Transpordi Varahaldus remaining under state ownership were lacking.
"For many years, people have been asking the same question, which the National Audit Office has repeated in its latest report –
'Should the state own an airline company in order to ensure flights to and from Estonia?'" Auditor General Janar Holm said.
"Life itself has provided an answer to this. The dream of flying under one's own flag might not be possible amid the tight competition of the aviation market without continuous financial support from the state and without violating the European Union's rules for granting state aid."
In the process of Audit , the National Audit Office came to know that there had been multiple attempts to stop unprofitable flights from Tallinn. However, the necessary agreements to do so were not reached at the level of the owner and the representative of the owner did not respond to serious issues, which had been pointed out by the company.
In late July, Minister of Climate Kristen Michal (Reform) ordered Nordica's supervisory board to conduct a special audit after the airline finished the first half of the year with a loss of €7.2 million.
David O`Brock, the chairman of the supervisory board of Nordic Aviation Group had said earlier,
In the past few months, the economic situation of Nordica has deteriorated sharply, and the company`s revenues have turned out to be considerably lower than expected. In turn, the costs significantly exceed the revenues.
Aiming a necessary air service link for Estonia and service a route network similar to that previously maintained by AS Estonian Air, Nordica was founded in the fall of 2015 at a cost of €40.7 million. However, the efforts didn't bring results , and three years later, the fundings from the state had essentially run out.
From the very begining , Nordica's management board had been searching compensatory opportunities in order to cover the loss of flying from Tallinn. In this bargain , it ended up wet leasing its aircraft and crews to other carriers. The management board repeatedly raised the issue of updating this strategy with the company's supervisory board as it was economically challenging to both meet the owner's expectation of continuing to fly from Tallinn and also remain profitable while competing with other international airlines.
However, neither Nordica's supervisory board nor the minister of economic affairs and communications in charge of the holding went along with the request to consider the sustainability of flying from Tallinn until the economic reality forced the closure of those routes.
Nordica's management board had requested a review of the business plan on almost ten occasions to no avail, before the minister of economic affairs and communications finally agreed to end regular flights from Tallinn in 2019, preventing the company from collapsing.
Starting in the summer of 2019, questions regarding whether the state needs an airline that does not fly from Estonia were repeatedly raised in the Estonian government. However, those discussions later died down.
Between the period of August 2019 and July 2021, there were two different ministers of finance, who on four occasions, asked the government to consider whether owning Nordica was justified. However, no conclusive reply or visible actions resulted from these appeals.
In July 2023, it became apparent that Nordica's economic situation had, since May this year, deteriorated sharply. The chair of the company's management board resigned, and international experts were hired to restructure Nordica's economic activities.
The Estonian Minister of Climate also decided to sanction a special audit of Nordica. According to the minister, the results of the audit be available within three months, with the company given six months to achieve stability.
Statistics reveal that Nordica failed to make a profit in the year 2021 and 2022, and although from August 2019, various ministers of finance raised concerns on a number of occasions regarding the expediency of owning the airline company, but , discussions surrounding the issue stalled and eventually was sidelined. Ultimately the Estonian government has yet to reach a decision on Nordica's privatization.
According to Auditor General Janar Holm, Nordica's story provides an example of a situation where the political risk of making a decision is high, while letting things carry on as they are appeared to be a safe option, at least initially.
"A decision was finally made only once the crisis has become extremely serious," Holm said. "By that point, the political and economic price was already very high. We can see that Nordica has increasingly moved away from its original goal – to ensure an air service for Estonia. This goal has not been achievable, commercially and as a result of the European Union's rules on state aid, which is why the public interest – to keep the company under state ownership following the termination of regular flights from Estonia – was questionable."
The National Audit Office was unable to identify any significant reasons to suggest that it was strategically necessary for the Estonian state to retain ownership of Nordica and Transpordi Varahaldus now, nor were there any arguments in favor of the company being state-owned prior to July, when Nordica's financial difficulties were made public.
The audit additionally found nothing to suggest there was any clear and understandable public interest in the state's need, as the owner of the two companies, to bear any risks related to their economic activities.
Keeping the findings in view , the Estonian National Audit Office therefore recommends that after the results of its special audit of Nordica have been released and the company's economic activities have been stabilized, the Estonian government decides which method of sale best suits the interests of the state. This may mean either privatizing Nordica and Transpordi Varahaldus together or separately, either partially or in full.
To access the complete Audit report in Estonian (pdf copy) click here.
