It was to be the year of the privatization of ADP, but it could rather be that of the takeover of Air France-KLM by the State. While the airline sector is one of the most affected by the coronavirus crisis, the prospect of a recapitalization of the air transport group is increasingly perceived as inevitable in the spheres of the State. According to a source familiar with the matter, the government is therefore studying a possible increase in the capital of Air France-KLM, in order to replenish cash which has been undermined by the fall in traffic and revenues.
Without announcing it clearly, Bruno Le Maire mentioned it in his interview this Friday on BFM-RMC. “We will help all companies in which the State has a stake”, said the Minister of Economy and Finance, citing the examples of Air France and Renault. The two companies have been particularly affected by the stock market crash in recent days. The Air France-KLM share quoted around 4.80 euros on Friday against around 10 euros in mid-February. The state share of 14.29% is now worth just under 300 million euros.
50% fixed costs and 50% less traffic
After the American decision to restrict the entry of European citizens to the United States, which is added to the fall in traffic to Asia and Europe, Air France-KLM, like its European competitors, lost half of traffic and turnover for the next 30 days at least. Knowing that the fixed costs of the airlines – over which they have no control – represent about half of its expenses, such a loss of activity risks very quickly drying up the treasuries, if no massive measure is taken to reduce expenses and replenish the coffers.
The director general of the International Air Transport Association (IATA) and former CEO of Air France-KLM, Alexandre de Juniac, clearly stated this in an interview with Reuters. “If the fall is as significant, as brutal, as we see now and if it lasts more than two or three months, we will see difficulties in certain airlines”, he warned.
Obstacles to recapitalization
Hence the race against time at state level to provide it with the necessary support. Bruno Le Maire and Benjamin Smith, the CEO of Air France-KLM, were to discuss this Friday on the support measures that the state could bring to the airline.
However, the scenario of a recapitalization would come up against several obstacles, the main unknown being the attitude of the Dutch State, which entered the capital of Air France-KLM in February 2019 by surprise. Now, the Dutch State is located , with 14% of the shares, at the same level as the French State, alongside two other major shareholders China Eastern (8.8%) and Delta Air Lines (8.8%).
Capital increase and dilution risk
To bring new money to Air France-KLM, the State would have no choice but to proceed with a capital increase, by creating new shares, since a repurchase of existing shares would bring nothing to the company. The scenario under study would be to raise up to 29% of the shares, in order to remain below the control threshold of 33% which would force it to launch a takeover bid for all the shares.
However, a capital increase would require the participation of the other reference shareholders of Air France-KLM. Namely the Dutch state, with which no agreement on governance has yet been found since its stock market raid in February 2019. But also Delta Air Lines and China Eastern, which each hold around 9% of the capital of Air France-KLM and are strategic commercial partners, with which a mess is not possible.
Convince partners
If the Dutch government, Delta or China Eastern refused to participate in a capital increase desired by the French state, their respective holdings would be automatically diluted. And all the more so since the Air France-KLM share has lost 50% of its value since the start of the year.
The strategic partners of Air France-KLM, whose investment has already lost more than half of its value, would thus find themselves marginalized on the board of directors in favor of a French State once again all powerful.
Finance an acquisition
The second obstacle, in the longer term, is the possibility for Air France-KLM to participate in the next phase of consolidation of air transport, which is inevitable at the end of this crisis. Such an operation is part of the medium or long term ambitions of Benjamin Smith, who knows he must go through an acquisition to hope to recover the lost ground against Lufthansa and the IAG group.
Given the state of Air France-KLM’s finances before the crisis, a significant acquisition would necessarily require a capital increase. If this capital increase is ultimately used to bail out Air France-KLM, it is part of Air France-KLM’s strategy that would be compromised.
Internal concerns
These are all reasons why a rise in the unilateral capital of the French State can be perceived with concern, within Air France-KLM, where there is a fear of a new Franco-Dutch showdown and where one largely prefers the solution of massive exemptions from charges and fees, and deferrals of social charges, possibilities of recourse to short-time working, as well as new lines of credit. These are the solutions chosen for Lufthansa.
However, tax reductions would notably require reconsidering certain measures linked to environmental policy, such as the “eco-contribution” and the future European carbon tax, which the government does not seem willing to do.
–
