Air France aircraft parked at Charles de Gaulle airport north of Paris March 24, 2020 file photo
Air France-KLM is almost brought down by the coronavirus (Chinese communist virus) epidemic: after a loss of 7.1 billion euros last year, operations are expected to lose 1.3 billion in the first quarter of this year. The French government’s plan to bail out Air France was approved today, April 6, by the European Commission. In exchange, Air France agreed to cede 18 operational shares of Orly Airport in the southern suburbs of Paris to a rival.
The European Commission said in a statement that the Air France-KLM recapitalization plan involves “the conversion of a €3 billion state loan granted by France into a hybrid capital bond for Air France. In addition, the capital will be increased by up to 1 billion euros through a capital increase “open to existing shareholders and the market”. This proposal was described by the French media as a “4 billion euro bailout plan”.
In this way, the French state increased its share of the capital of the company from 14.3% to almost 30%, making it the largest shareholder of Air France-KLM.
Air France-KLM lost two-thirds of its customers in 2020 due to the border closures that accompanied the coronavirus Covid-19 pandemic, lost 7.1 billion euros for the year and almost doubled its debt to 11 billion euros. On Tuesday, Air France-KLM said it expects to stack up an operating loss of 1.3 billion euros in the first quarter of the year.
However, Air France-KLM, which has cut costs and staff, is far from defaulting on payments and had a cash and credit line of 8.8 billion euros at the end of February, although the amount is 1 billion less than at the end of 2020.
According to AFP, this new French state aid to Air France-KLM is related to the first €7 billion of emergency aid announced in April 2020, namely €3 billion in direct loans and €4 billion in bank loans guaranteed by the state. The 3 billion in direct loans will be converted into “hybrid perpetual bond instruments”, i.e. securities between traditional equities and bonds: these amounts will be assimilated into equity capital. The Group’s debt will be reduced by the same amount.
Air France-KLM aims to have a net debt of no more than twice the total operating surplus by 2023: this ratio is an indicator that investors look at because it reflects the company’s ability to meet its obligations. According to Frédéric Gagey, Air France’s Finance Director, this is “a level that will allow the group to refinance itself on the financial markets”.
China Eastern Airlines participates in the capital increase
At the same time, Air France-KLM will launch a capital increase. Shareholders will have the right of first refusal to maintain (or even increase) their shares if they wish.
The French government increased its stake from the current 14.3 percent to nearly 30 percent. The Dutch government, which holds 14 percent of the shares, has decided not to participate in the increase. The Dutch government said Tuesday it was continuing discussions with the European Commission on “the possibility of a capital injection for KLM,” but said there was no “urgent need.
The other two major shareholders are Eastern Airlines and Delta Air Lines, each with an 8.8 percent stake. China Eastern has agreed to participate in the capital increase, but will keep its stake below 10 percent. Delta will not be able to participate in the capital increase due to country of origin regulations for this U.S. company.
The French state is expected to reduce its stake after Air France-KLM’s financial situation improves.
The European Commission, the guarantor of balanced competition, approved this Air France aid package while asking Air France to make concessions, especially in terms of airport operating slots. The EU wanted Air France to give up its share of 24 operations at Paris-Orly airport, but the final negotiations resulted in the concession of 18. This was a compromise that the French government and Air France management found acceptable.
Air France-KLM Chief Executive Benjamin Smith said Tuesday that giving up the slots, which are coveted by low-cost flight giants such as Ryanair, would not “have a significant impact on the transformation plan that Air France has started.
Air France-KLM said it agreed to sell the slots on the condition that “competing airlines (……) that acquire the slots shall be required to locate their aircraft and crews at Paris-Orly Airport and to comply with French national and European labor laws.”
In addition, Air France-KLM will not be able to pay dividends until the aid is repaid.
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