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Montenegro seeks legal avenues to inject cash into its National Airline

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A liquidity crisis is looming in Air Montenegro, but the state does not want to give the airline state aid because this is incompatible with EU rules.

The Government of Montenegro is looking for a legal way to provide funding for its startup national airline, Air Montenegro. The airline has had a good summer season despite some challenging circumstances, but the highly seasonal nature of the Montenegro market means it is heading into a liquidity crisis next year.

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Chapter 8 is a problem for Air Montenegro

The management of Air Montenegro met with representatives from Montenegro’s Ministry of Capital Investments, who informed the airline executives that further financial support is not compatible with Chapter 8, a set of Competition Policy rules that Montenegro must follow as part of its application to become a European Union member.

The Chapter, which Montenegro opened on 30th June 2020, includes both Competition Policy and State Aid rules. The incompatibility of multiple rounds of state aid with Chapter 8 was the reason why the Government of Montenegro shut down Montenegro Airlines in December 2020. Air Montenegro was set up as a brand new company to replace Montenegro Airlines, and this was done in record time.

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However, there was no continuity between Montenegro Airlines and Air Montenegro.This has led to some strong challenges for Air Montenegro.

How much money has been given already?

When the Government of Montenegro founded Air Montenegro last year, it gave it 30 million euros ($31.5 million) in startup capital. This was not a lot of money to start a brand-new flag carrier, so the airline now requires more.

Additional funding is needed for two reasons: firstly, to cover the operational losses that Air Montenegro is making while it is still a startup airline. The losses are particularly steep outside of the summer season. Secondly, Air Montenegro needs money to expand its fleet and broaden its destination network so that it can generate additional revenue in the future.

However, the Government does not have a legal avenue to provide this required cash injection, and this has now turned into an existential issue for Air Montenegro.

The Ministry of Capital Investments said (translated):

“Keeping in mind the importance of having a national airline, and taking into account the funds invested so far, we believe that an additional effort should be made in order to find an option in accordance with the law on state aid. This would make a large difference for a company that is still in its infancy and which is still overcoming problems.”

A liquidity crisis is looming

Air Montenegro’s board has now notified the Government of Montenegro that the airline will face a liquidity crisis by the autumn of next year.

They also said that the company cannot have a sustainable future with just two aircraft in its fleet and that it cannot afford to purchase any new ones.

The maintenance of the engines of the existing two E195 aircraft in the airline’s fleet will cost $27 million over the next five months as Air Montenegro braces itself for a major ramp-up of operations at the start of the summer 2023 season at the end of March.

The management of Air Montenegro wanted the Government to initiate a restructuring process, but this is not compatible with Montenegro’s law either: such a procedure can only be initiated for companies that have been in business for longer than three years. Air Montenegro was only founded last year.

The Ministry does not view the situation positively, adding (translated):

“The report by Air Montenegro’s management confirmed what we already knew, but, based on the principles on which the previous Government founded the company, we still expected better results. Despite the initial talk of professional management, expert professional staff guided by international experience, and an optimal number of employees, the company has failed to achieve success, and now we face an unenviable situation in the company.”

Air Montenegro got a new Board of Directors in September this year. However, no one is actually in charge of the airline: Predrag Todorović, who unexpectedly quit as CEO in March, was replaced by an Acting CEO, Dragana Frantov. However, her contract ended at the end of October and no one has been appointed since.

The Montenegrin Government, which owns the airline in full, wants the new management to come up with a development strategy and a proposal for how to resolve the critical issues facing the airline. It has criticized the lack of progress, stating (translated):

“It has been shown that international experience and industry experience have not been a guarantee for success. (…) We expect that the new management, through close communication and cooperation with the Board of Directors, will propose a model for rehabilitating the situation and getting the national airline out of this crisis.”

How is Air Montenegro performing?

Air Montenegro has two Embraer E195 aircraft in its fleet, but it also wet-leased an Airbus A320 from Trade Air for the duration of the summer to boost its seat capacity and significantly expand its destinations network.

However, it only handled less than 300,000 passengers in the first nine months of 2022. It also made a loss of €1.6 million ($1.7 million) by mid-October, which is a substantial negative result when viewed on a per-aircraft basis, per-employee basis, or even on a per-passenger basis for Air Montenegro.

Russia’s invasion of Ukraine is an existential threat to Air Montenegro because both Russia and Ukraine are highly important emitting markets for Montenegro’s tourism industry. Multiple destinations in both Russia and Ukraine would have constituted highly lucrative summer markets for Air Montenegro this year, but the company could not fly there.

This summer, the airline operated scheduled flights to 14 destinations out of both of Montenegro’s airports: Podgorica (TGD) and Tivat (TIV).

However, at the moment, it only flies to Ljubljana (LJU), Istanbul (IST), and Belgrade (BEG). Because of its small timetable, one of its Embraers is entirely redundant.

The airline is not an IATA member, and it has no codeshare agreements, Simple Flying writes.

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