Air France-KLM: come fly the Balkanised skies
The political pressure created by financial strain will continue
Keeping up with the neighbours is a costly venture for France and Germany. Both countries have dug deep in their pockets to help travel groups through the crisis. French measures to keep Air France-KLM in the air continue the one-upmanship. State investment always comes at a price for minority shareholders.
The deal comprises €1bn of new equity and the conversion of €3bn of French government loans into hybrid debt. The loans were part of last year’s larger bailout of the Franco-Dutch airline. Capitalising interest payments will ease cash flow pressures, which chief executive Benjamin Smith puts at about €10m daily.
The Dutch state is notably absent from the deal. Its shareholding will roughly halve. France’s shareholding is likely to double. AF-KLM is becoming even more of a French strategic asset. Private shareholders whose muted demand meant the new equity priced low are right to be cautious.
The Netherlands increased its stake to 14 per cent in 2019 to match France’s holding. The newly-raised funds will only be going to the French arm of the business, which explains the unwillingness of the Dutch to take part. Treating a unified business as separate entities does not bode well for the future of AF-KLM. The airline needs all its backers pulling in the same direction to succeed.
But the political pressure created by financial strain will continue. The company wants to reduce its net debt to below two times ebitda by 2023. The latest financing may only bring it down to three times.
If European travel resumes as hoped, the airline might still need another €2bn of new equity, said Daniel Roeska of Bernstein. Interventionist France is the most likely source. That would further skew the cross-border alliance while making job cuts even harder to accomplish in an environment where politics has ensured overcapacity persists.
Minority shareholders can thank France for forestalling a wipeout. But they should not expect anything other than sluggishness from the stock when the pandemic abates.