Commission softens resistance to bail-out

The European Commission will approve State support for Aer Lingus if the Government offers cast-iron guarantees that workers will accept major cutbacks and that the troubled airline can be made viable.

Up to now, the EU Transport Commissioner, Ms Loyola de Palacio, has insisted that member-states cannot bale out troubled airlines - despite the Bush administration's decision to offer subsidies to US competitors.

The Belgian government was allowed by the Commission yesterday to offer a one-month £100 million (E;127 million) bridging loan to its bankrupt national carrier, Sabena, but only under strict conditions.

Following a meeting yesterday with the President of the European Commission, Mr Romano Prodi, the Taoiseach, Mr Ahern, indicated the Government was keen to avoid an open confrontation with the Commission.

Under the EU's rules, airlines can get only one round of State aid. This occurred in 1993 in Aer Lingus' case. "The 'one time, last time' rule must be applied," said Ms de Palacio.

However, State assistance can still be offered in exceptional circumstances, according to regulations governing the operation of Articles 92 and 93 of the EC Treaty and Article 61 agreement of the European Economic Area.

Under these rules, the Commission can approve a package if the company can produce profits "by reference to a comparable private enterprise, within a reasonable period. The Commission will accordingly analyse the past, present and future commercial and financial situation of the company. In its assessment, the Commission will normally not limit itself to the short-term profitability of the company," it reads. Interpreting the rules last night, a senior EU source told The Irish Times the Government had "a better than average chance" of getting clearance for a £125 million loan guarantee, if it can be proven that Aer Lingus has a future.

"In that case, it would be like an investment by a private company. As such, it isn't a State aid under the rules. Therefore, it would be allowed. But we all need to be clear that this is the case," said the source, who spoke on condition of anonymity.

Indicating that the future of Aer Lingus lies first in the hands of workers and management, the Taoiseach said negotiations with Brussels could not begin until both sides had reached a full and final cutbacks deal.

Under the package presented to the Minister for Public Enterprise, Ms O'Rourke, on Monday, the airline's workforce would be cut by 40 per cent, while those who remain would have to accept draconian changes in work practices.

"They have to come to an agreement. When that happens, we can see what the resolution will be. We know the rules on State aid. We know this," the Taoiseach said.

The EU Transport Commissioner faced difficulties, he acknowledged. "If she goes outside the rules, people will go to court. But Aer Lingus is facing up to its reality. Its restructuring package is very radical. We are taking a very prudent approach, we are not considering an unquestioning bale-out. Our priority is to keep Aer Lingus viable."

The Commission's decision on Sabena provoked outrage from Ryanair chief executive, Mr Michael O'Leary, who immediately began a legal action against it before the European Court of Justice. The EU Transport Commissioner insisted Sabena could get nothing more than a short-term bridging loan from the Belgian government. In particular, it will not be allowed to fund restructuring or even the firm's winding-up.