EUROPEAN COURT RULES AGAINST OLYMPIC AIRLINES ON

UNCLAS SECTION 01 OF 02 ATHENS 001372

SIPDIS

STATE FOR EB/TRA, EUR/ERA, EUR/SE

E.O. 12958: N/A
TAGS: EAIR ECON GR OLYAIR
SUBJECT: EUROPEAN COURT RULES AGAINST OLYMPIC AIRLINES ON
ILLEGAL STATE AID


SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY


1. (SBU) SUMMARY: The May 12 decision of the European Court
of Justice (ECJ) confirming the European Commission's
position that the GoG's payment of 194 million euros to
Olympic Airlines (OA) was an illegal subsidy does not appear
to have altered the GoG's plan to sell the ailing national
carrier. According to OA's management, the Commission and
the GoG must now negotiate the details of how and when OA
will return the 194 millions euros. One option is for the
proceeds of the sale of certain elements of Olympic Airways
(technical services and ground handling) to be used to repay
the illegal subsidy. Within the next few weeks, the GoG will
ask for the Commission's approval to continue the ongoing
tenders for the sale of OA. According to OA officials, the
ECJ's decision has made the need for the sale of Olympic
Airlines that much more urgent. END SUMMARY.

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ECJ'S DECISION
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2. (U) On May 12 the European Court of Justice (ECJ)
confirmed the European Commission's position that the GoG
payment of 194 million euros to Olympic Airlines (OA) between
1998 and 2000 was an illegal subsidy. As a result, the ECJ
has ordered OA to return this amount to the state's treasury.
The ECJ, however, did not set a specific timetable for the
repayment and did not impose any additional fines (although
the GoG must cover court costs).


3. (SBU) According to OA's Managing Director, Leonardos
Vlamis, the ECJ decision was much better than expected. Now
the Commission and the GoG must negotiate the details of how
and when OA will return the 194 million euros. One option is
for the proceeds of the sale of certain elements of Olympic
Airways (technical services and ground handling) to be used
to repay the illegal subsidy. Within the next few weeks, the
GoG will ask for the Commission's approval to continue the
ongoing tenders for the sale of OA's flying operations,
technical services, and ground handling. If the Commission
grants approval, then the tenders will continue as scheduled.
According to OA officials, the real impact of the court
decision is that it increased the need and urgency for the
sale of the airline. If privatization efforts fail once
again, OA will have no choice but to liquidate some of its
assets to recover the funds.

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PRIVATIZATION EFFORTS CONTINUE
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4. (U) The GoG is in the midst of its second attempt to sell
Olympic Airlines following its 2003 restructuring and
separation from Olympic Airways (and the fifth if one
includes the GoG's attempts to sell the predecessor Olympic
Airways). However, this new, slimmer, and ostensibly more
efficient airline continues to have losses even after its
separation from Olympic Airways -- 23 million euros in 2003
and reportedly much more in 2004 (official figures not yet
available). Currently OA employs about 1,850 people and has
a fleet of 36 airplanes of which 14 are Boeing 737-300s and
-400s.


5. (U) On February 25 the Inter-ministerial Committee on
Privatization (including the Ministers of Economy,
Transportation, and Employment) approved a short-list of five
bidders. The five bidders (the Greek private carrier Aegean
Airlines, German budget carrier DBA, Britannia Aviation
International Services, Greek-American Chrysler Aviation, and
another Greek-American consortium) submitted binding offers
for the purchase of OA last month. This tender process,
however, was briefly suspended pending the ECJ's decision.


6. (SBU) COMMENT: Our contacts in the Transport Ministry and
at Olympic Airlines are optimistic that the ECJ decision will
not alter the GoG's plans to sell OA. They admit, however,
that the decision may add an additional burden to the ongoing
privatization. It is particularly interesting that the ECJ
acknowledged the transfer of assets from the old Olympic
Airways to the new Olympic Airlines has made it virtually
impossible to recover the entirety of the funds. While the
ECJ meant this to be a criticism of the GoG's handling of
this case, the practical effect may have been to strengthen
the GoG's hand vis-a-vis the EC. The EC has always demanded
that Olympic Airlines, as the flight operations company, bear
the burden of repayment. The GoG is sure to raise the ECJ's
point in order to shift the repayment burden to Olympic
Airways, a company with considerably dimmer sale prospects.
END COMMENT.
Kaiser