European airlines need emerging markets capital. Now!

01.16.2018 [0]

How to balance the EU airline ownership and control rules with investors` demand in high risk ventures to have a protection akin to a shareholder

European airlines need an immediate injection of considerable and cheap funds. Soaring fuel and maintenance costs of less economical fleet acquired in previous periods, coupled with the need to keep along the current levels of fares due to ever increasing caution about the recurrence of economic downturn form the outside pressures. Internal pressures are spearheaded by various breeds of low cost carriers and continuous improvement in the EU-wide railroad systems, the latter luring with generally lower fares, absence of queuing or various exposures to routine security checks, and, generally more legroom (translating, in the minds of passengers, into a greater comfort for less price).

For airlines, customary way of attracting funds was through shareholder contributions to the equity, credit lines issued by European banks, or raising funds through floating shares on stock exchanges. These sources, in light of the current European economical realities, will most likely refrain from doing so, or demand a too high price. The solution, for airlines, lies in attracting an external funding from emerging economies, such as China or Gulf States – the latter seek expansion, the former have enticement to give in return. Still, high risk of aviation business would lure these investors to indulge on a condition of their becoming a shareholder or obtaining a similar status.

Such solution must comport with the EU law requirements concerning the ownership and control of EU airlines. EU Regulation No 1008/2008 of 24 September 2008 requires that, for an airline to be permitted to operate intra-EU routes, it shall be more than 50% owned and controlled (meaning direct or indirect ability to determine the strategic decisions of an airline) by one or more EU Member States or their nationals. To balance the interests of the fund providers to secure a safeguard above the standard common in loan issuance with the requirement of the EU law of airline ownership and control, it is suggested to resort to reciprocal (cross-) shareholding – a system where corporate entities are owned and controlled by each other – and adding necessary refurbishments to ensure a proper corporate governance regime and eliminate concerns commonly raised in respect of cross-shareholdings.

The solution is achieved in three easy steps.

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