Montenegro says it will invest four million euros in a new flag carrier to replace Montenegro Airlines, whose planes have been grounded since the government said it would shutter the debt-hit airline last month.

-We have decided to create a limited liability company for passenger air transport called 'ToMontenegro'- the government said in a statement Thursday.

The government will put four million euros of founding capital to create the new firm, it said.

Montenegro's new government -- which ended three decades of rule by the Democratic Party of Socialists (DPS) when it came to power last year -- announced in late December that it planned to shutdown Montenegro Airlines because of the high debt the firm had accumulated even before the pandemic severely curtailed air traffic in 2020.

The airline employs around 360 people and has a fleet of four leased planes -- three Embraer 195s and a Fokker F100 -- which have been grounded since the announcement in December.

On its website, the airline described the government's decision as "radical" and "unexpected", apologising to passengers whose flights were cancelled.

Montenegro's President Milo Đukanovic, whose DPS lost August legislative elections, has denounced the closure as a "populist" decision.

The previous DPS-led government had pushed for a 155 million euro rescue plan, including 105 million euros in debt repayment, but the subsidies were dropped after Ireland's Ryanair launched an appeal to the European Commission, citing overprotection from the state.

Tourism is an essential pillar of the economy in Montenegro, a country of some 650,000 people wedged between mountains and the Adriatic sea.