France will contribute to a 4 billion euros ($ 4.7 billion) recapitalization of Air France-KLM and more than double its stake to nearly 30%, according to plans announced Tuesday with the approval of the ‘European Union. The move is the latest by a large airline group to consolidate its finances after more than a year of travel stoppages linked to COVID-19 and heavy losses for the sector.
The French government will convert a € 3 billion loan granted last year into a perpetual hybrid bond instrument and subscribe to a € 1 billion share issue, increasing its stake in Air France-KLM by 14, 3% currently. “This will make the state the largest shareholder of Air France,” said Finance Minister Bruno Le Maire, qualifying this approach as “a sign of commitment” to the airline and its employees.
The agreed conditions demand that France find a “credible exit strategy” within a year and bring its shareholding back to pre-crisis levels by 2027. Dividends, share buybacks and management bonuses are prohibited until most or all of the aid has been repaid. Other measures include the extension until 2023 of state guarantees on an additional € 4 billion in loans granted to Air France-KLM last year.
Under the conditions approved by the EU, Air France will cede 18 Paris-Orly take-off and landing slots to its competitors, or 4% of its current portfolio at the airport. But in a detail presented by Le Maire as a key victory, the slots sold will be limited to planes based in Orly with crews under local contracts.
This could reduce their appeal to ultra-low-cost competitors such as Ryanair and Wizz Air – often accused of undermining traditional airlines with crews hired in low-tax jurisdictions. The restrictions will protect a planned expansion of Air France’s low-cost airline, Transavia, from unfair competition, Air France-KLM boss Ben Smith said on Tuesday.
“We were listened to by the Commission (regarding) the dumping practiced by certain low-cost companies on the French market, which could have endangered Transavia”, declared the managing director. In response, Ryanair condemned what it called the “ineffective remedies” imposed by Brussels and said the aid “would hurt competition in the air transport market for decades to come”.
DUTCH HOLDING The bailout is the closest to a renationalization of a major European carrier, after Germany took a 16.7% stake in Lufthansa as part of its bailout.
The Netherlands, which bought 14% of Air France-KLM in 2019 to counter French influence, will not join the capital increase, which will ease the impasse in the governance of the group while potentially adding to the pressures of rupture from certain Dutch political circles. The likely dilution of the Dutch government’s stake to 9.3% “has no consequences for the protection of public interests,” Dutch Finance Minister Wopke Hoekstra told lawmakers on Tuesday.
Dutch officials are in separate talks with Brussels over new support to KLM that could lead to a similar conversion of the state’s € 1 billion loan into hybrid debt. Delta Air Lines, an 8.8% shareholder in Air France-KLM, is prohibited from investing under US federal aid rules and will be diluted. China Eastern plans to acquire new shares while keeping its stake below 10%, the group said.
Air France-KLM action closed up 1.6% to 5.22 euros on Tuesday. The stock is down nearly 50% from pre-pandemic levels, partly reflecting the potential for additional stock issues. The group said it would seek shareholder approval next month for “additional measures” to strengthen the balance sheet and reduce net debt to a target of twice earnings before interest, depreciation, taxes and amortization ( EBIDTA) by 2023.
“This is not the end of actions to strengthen the balance sheet,” said Bernstein analyst Daniel Roeska, warning that “further dilution for shareholders” was likely. Deutsche Bank, HSBC and Natixis are advising Air France-KLM on its refinancing.
Updating its forecasts, Air France-KLM has indicated that it expects an EBITDA loss of 750 million euros for the first quarter, against its deficit of 1.7 billion euros for the whole of 2020. budget, he added. The group said it “still expects a significant upturn in demand” as COVID-19 vaccination campaigns allow summer travel to resume in the coming months.
($ 1 = € 0.8467)
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