Estonia's flagship airline on Saturday announced its bankruptcy after the European Union ruled it would have to pay back 85 million euros plus interest of state aid pumped into the struggling business to keep it flying.
Authorities in Tallinn however moved to absorb the shock by immediately setting up a new carrier to take over key routes.
"Estonian Air will cease operations from November 8," the company's web page said Saturday.
The carrier promised passengers with tickets would be offered replacement flights with other airlines, or they could claim a refund payable in December.
The announcement came after the European Commission earlier Saturday ordered the state-controlled airline to pay back the millions it had received in aid.
"The European Commission has concluded that aid measures by Estonia in favour of national flag carrier Estonian Air gave the company an undue advantage over its competitors in breach of EU state aid rules," the EU's executive branch said in a statement.
"Estonian Air therefore needs to pay back the state aid already received, which according to the Commission's information amounts to about €85 million ($91 million) plus interest, and cannot receive an additional €40 million of restructuring aid," it added.
The Baltic country's flagship carrier had been struggling financially since 2006, the Commission said, adding that the company should not continue to rely on public money to survive.
"It would not be a good use of taxpayer money to keep Estonian Air in the market artificially -– nor would it be fair to competitors, which have to compete without such support," said Commissioner Margrethe Vestager, in charge of competition policy.
The government in Tallinn announced it had already formed a new state-owned business named the Nordic Aviation Group (NAG) that would take over eight of Estonian Air's key routes from Sunday.
"The rules of the European Union are very harsh, that is why we start with a clean sheet and a new team," NAG chairman Peeter Tohver said in a statement, adding that the new company should not be seen as Estonian Air's legal successor.
NAG does not yet have its own fleet or crew. Other airlines will be contracted to operate flights, while Slovenia's Adria Airways will provide the operator's certificate, commercial platform and ticketing system.
The European Commission, which has probed several other European airlines, has in the past also ordered Cyprus Airways and Hungary's Malev to pay back aid packages deemed illegal.
Both airlines were also subsequently closed.
Estonian Air was formed soon after the country regained its independence from the Soviet Union in 1991.
"Thank you to all employees of Estonian Air for 24 years of good service," Prime Minister Taavi Roivas tweeted.