The French government likely just spent the most money ever on airport landing slots. A €4 billion deal to recapitalize the Air France–KLM group will see a token divestment of operating slots at Paris-Orly airport, assuming a competitor is keen.
Today’s announcement demonstrates both the strong commitment of the French State and the renewed support of the Dutch State to help the Group weather this pandemic and this crisis. The commitment of our long-standing partner China Eastern Airlines to participate in the forthcoming capital increase also highlights a resolute confidence in the strengths and prospects of the Air France-KLM Group.– Anne-Marie Couderc, Chair of Air France-KLM Board of Directors
The deal includes a capital increase up to €1 billion, with the French government and China Eastern committed to participate. The French ownership will increase to just 30% and China Eastern’s just below 10%.
The Dutch government approved the actions and is in discussions regarding potentially similar actions with KLM, but it will not invest new capital at this time. It held 14% of the Group’s shares; that is expected to dilute to just under 10%.
These first recapitalization measures are an important milestone for our Group in this exceptionally challenging period. They 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. Ensuring Air France-KLM maintains a sustainable financial trajectory is paramount to realizing our strategic plan, continuing the execution of our transformation plans at the Group and at our airlines.– Air France-KLM Group CEO, Benjamin Smith
Delta Air Lines previously owned 8.8% of the Group and will also not participate in the offering. Air France-KLM calls out this decision as driven by restrictions related to the CARES Act rather than a voluntary choice by the US airline.
In addition to the increased capital a €3 billion loan provided by France in May 2020 converts to Super-Subordinated Notes. This accounting play “will improve the Group’s equity by €3 billion under IFRS accounting standards with no cash impact, while increasing the Group’s flexibility in its mandatory debt redemption profile spread over time.”
A slippery slot situation
In exchange for this €4 billion the airline must cede slots at Orly airport in Paris. Or maybe not.
European Commission rules require “additional measures to preserve effective competition” in markets where government aid is offered. These may include structural or behavioral commitments. For Air France that means a slots play at Orly.
The agreement calls for up to 18 slots to be surrendered by the airline. But these slots will be reserved for a local competitor. The company explains that the slots must be used by “a competing carrier in order to create or develop an existing base at [Paris-Orly] airport, provided that the competing carrier obtaining Air France’s slots bases its aircraft and crews at Paris-Orly airport, in compliance with national and EU labour laws.”
Unless a competitor wants to base planes and crew at Orly the slots could remain with Air France. That condition of exchange could prove fruitful to Air France, a bit of an extra gift from the government on top of the €4 billion.
Other general commitments include restrictions on acquisitions, share buy-backs dividend distributions and executive management’s remuneration. These commitments are applicable to the entire Group with the exception of KLM and its subsidiaries.
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