PARIS (Reuters) – France to contribute € 4 billion ($ 4.7 billion) recapitalization of Air France-KLM and more than double its nearly 30% stake, under announced plans 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 COVID-19 travel closures and heavy losses to the industry.
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 workers.
The agreed conditions oblige France to find a “credible exit strategy” within a year and to bring its participation 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.
Under the approved conditions, Air France will also cede 18 Paris-Orly take-off and landing slots to its competitors, or 4% of its current portfolio at the airport.
But breaking with the usual practice which can anger low-cost competitors such as Ryanair, their reallocation will be limited to rival planes based in Orly with crews employed on local contracts.
This will shield from unfair competition a planned expansion of Air France’s own low-cost airline, Transavia, Ben Smith, CEO of Air France-KLM, told reporters on Tuesday.
The restrictions on the reallocation of slots have been “one of the sticking points” in the endless talks with Brussels, Le Maire said. “We don’t want any social dumping.”
Ryanair did not immediately respond to a request for comment.
Other measures include the extension of state guarantees on € 4 billion of bank loans to Air France-KLM.
Deutsche Bank, HSBC and Natixis are advising the airline on its refinancing.
The bailout is the closest a major European carrier has come to re-nationalization, 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 rise in capital – breaking a governance deadlock within the group while potentially increasing pressures of rupture of 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.
The Dutch authorities are in separate talks with Brussels on further support to KLM that could lead to a similar conversion of the state’s billion euro loan into hybrid debt.
Delta Air Lines, an 8.8% shareholder in Air France-KLM, does not have the right to invest 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 shares were up 0.3% to 5.26 euros at 9:18 a.m. GMT. The stock is down nearly 50% from pre-pandemic levels, partly reflecting the likelihood of further dilutive capital increases.
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, amortization, taxes and depreciation (EBIDTA) by 2023.
By updating its forecasts, Air France-KLM has indicated that it expects an EBITDA loss of 750 million euros for the first quarter, against a 1.7 billion euros deficit for the whole of 2020. The results January-February were better than expected and investments 10% lower on 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 USD = 0.8467 euros)
Reporting by Laurence Frost and Dominique Vidalon Additional reporting by Toby Sterling in Amsterdam and Foo Yun Chee in Brussels Editing by David Goodman and Mark Potter