Contributor - Europe

Cathy Buyck

The French state stands to become Air France-KLM’s largest single shareholder, potentially owning just under 30 percent of the Franco-Dutch group, following a deal that will see Air France receive up to €4 billion ($4.7 billion) for its recapitalization.&nbsp;The European Commission said it approved the recapitalization aid under the bloc’s subsidy&nbsp;rules because it will prevent the insolvency of Air France and its holding company, which&nbsp;would have serious consequences on French employment, connectivity, and foreign trade.

 


“The public support will come with strings attached,” insisted EC competition commissioner Margrethe&nbsp;Vestager. Air France will release 18 daily takeoff and landing slots at Paris Orly Airport—fewer than the 24 initially requested by Brussels—to a competing carrier to create or develop an existing base. To prevent what French finance minister Bruno Le Maire described as “social dumping,” the competing carrier obtaining Air France's slots must base its aircraft at Orly Airport with crew contracts complying with national and EU labor laws.&nbsp;Other commitments include restrictions on acquisitions, share buybacks, dividend distributions, and executive management remuneration.

 


With 18 daily slots at Orly and no slots surrendered at its main base at&nbsp;Paris Charles de Gaulle Airport, Air France seems to have gotten off lightly. As part of its bailout, Lufthansa last year agreed with the European Commission to transfer to one competitor each at Frankfurt and Munich up to 24 takeoff and landing slots for the stationing of up to four aircraft.

 


Air France’s recapitalization covers the conversion of the €3 billion state loan, granted by Paris in 2020, into hybrid debt and a capital injection of up to €1 billion. The planned share capital increase will be open to the market and prioritize existing shareholders, although several of these will not subscribe to the capital raise. The French state has committed to participate while keeping its stake “strictly” below 30 percent of the share capital and voting rights. China Eastern Airlines also intends to participate—it owns 8.8 percent now—as part of what Air France-KLM described as a “further reinforcement of strategical cooperation with the group.” The Chinese airline will keep its stake below 10 percent. In contrast, the Dutch state will not subscribe to this capital increase and neither will Delta Air Lines—which holds 8.8 percent—due to the restrictions contained in the Covid-relief legislation in the U.S. known as the CARES Act.

 


In a statement detailing the recapitalization and the French government’s plan to double its shareholding in the group, Air France-KLM noted that the Dutch state “approved this set of actions” while continuing its own discussions with the European Commission on potential capital-strengthening measures for KLM. “In time, KLM will also need capital,” the Dutch airline confirmed on Tuesday. “For that purpose, the Dutch state is in talks with Brussels, Air France-KLM, KLM, and other stakeholders.”

 


France currently owns 14.3 percent of the Air France-KLM group and the Netherlands owns 14 percent after a surprise purchase of an additional 12.68 percent in 2019, a move the Dutch government explained it made to acquire an interest that almost equals that of the French state and allows it to influence the future development of Air France-KLM “directly to serve the Dutch public interest.”

 


Air France’s recapitalization measures “will provide Air France-KLM with greater stability to move forward when recovery starts, as large-scale vaccination progresses around the world and borders reopen,” asserted Air France-KLM Group CEO&nbsp;Ben Smith. The company, however, noted that it continues to consider additional measures to further strengthen the balance sheet as the group's net equity will remain negative after this “first step.”

 


Air France-KLM recorded a €7.1 billion loss for full-year 2020 and on Tuesday said it expected a loss of €1.3 billion the first quarter.

 


Last year, Air France received €7 billion in aid and state-backed loans guaranteed by the French government while KLM received €3.4 billion from the Dutch government to help it through the pandemic.

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