State Flies to the Aid of Air France-KLM

Yesterday the French government said bon voyage to €4 billion.

After a lengthy negotiation with the European Union, the French state announced a hefty bailout package for its beleaguered flag-carrying airline, Air France-KLM.

Aidez-moi SVP

You know the story. Airlines have been pummelled by the pandemic with holidays abroad and corporate travel — Air France-KLM’s bread and butter — frozen in time. And while America is rolling out vaccines roughly 5x faster than the rest of the world, Europe is struggling with jab shortages and a crushing third wave of coronavirus.

In France, President Emmanuel Macron ordered the country’s third pandemic lockdown last week, including a nightly 7pm to 6am curfew. And so Air France-KLM’s woes persist while it burns through €10 million per day.

To keep Air France-KLM afloat, the French state — already a 14.3% shareholder — will convert €3 billion in loans it gave last year into equity and join a €1 billion capital raise on top of that. It will become the airline’s single-largest shareholder in the process.

Un String Attached: The deal took months of negotiations to get approval from the EU, which structured the deal to ensure shareholders would not benefit unfairly from the cash injection:

• France, whose ownership could rise to as much as 29.9%, promised to devise an exit strategy from the investment in 12 months, unless its equity falls below 25% by then.
• Air France-KLM is banned from paying out dividends and making share buybacks. It will also have to cap pay and bonuses.
• The airline had to surrender 18 of its more than 300 landing and take-off slots at Paris-Orly airport, which will now be hived off to the competition.

The Netherlands Not Going Dutch: The Dutch government — a 14% stakeholder in Air France-KLM — is staying out of the deal. As such, the funds will only go to supporting the airline’s French operations.

the takeaway

Of course, France is not unique in bailing out a prized airline. The German government took a 20% stake in Deutsche Lufthansa AG and Italy fully nationalized bankrupt Alitalia SpA.