Where did the money that saved the airlines come from?

The COVID-19 has taken a toll on the airline economy and airlines around the world have had to call for help to survive the crisis.

In most cases the States have done the job and helped their national airlines, or at least the most significant ones. This has sometimes been criticized in terms of the use of public funds, but it is only logical because :

Air transport contributes directly or indirectly in a significant way to the employment and economy of many countries.
the airlines were not, this time, victims of their management errors but of the decisions of these same governments, so it was logical that they should assume the consequences (even if it is sometimes at the price of counterparts difficult to understand).

And when we know, in the case of France, that the SNCF costs, at cruising speed, twice the bailout of Air France each year for the taxpayer (plus a few occasional gifts), it allows us to put the church back in the center of the village.

That said, to say that the airlines were saved by public money is not always accurate or not totally. The opportunity to take stock of the devices that have been developed and to ask whether the use of public funds has not been a little too systematic or hasty compared to private funds.

Air France-KLM : shareholder loan and securities

The French government saved Air France KLM in two ways.

By securing 90% of the loans made by private banks to Air France. (4 billion)
By making a shareholder loan to Air France-KLM. (3bn)

As for the loans to Air France, there is no public money engaged as long as the airline repays them. Otherwise the banks will be able to charge the state up to 90% of the loan. But we are not there yet.

As for the shareholder loan to Air France-KLM, we are talking about public money which, in case of non-repayment, could one day be converted into capital. The advantage of a shareholder loan compared to a bank loan is that it is not necessarily accompanied by the payment of interest and requires less formalism than a capital increase. The disadvantage is that the repayment is due at any time, which can weaken the business. This is not the case here, but it may be a way to increase political influence in the management of the company.

Many of you are probably wondering why the State did not lend directly to Air France. It was simply impossible because it is only a shareholder of Air France-KLM and not of Air France (Air France-KLM is a 100% shareholder of Air France).

The Netherlands in solidarity in their own way

It is interesting to compare this with the way in which the Dutch state contributed to the rescue of the Franco-Batavian team.

KLM will receive 3.4 billion euros, broken down as follows

A 2.4 billion loan from a pool of private banks, 90% guaranteed by the State
A direct loan from the State to KLM of 1 billion euros.

You will notice that KLM is much more helped in proportion to its size but that’s not all. All the money goes directly and exclusively to KLM, so France has been the only one to help the parent company so far!

How is this possible when France could not lend directly to Air France? Well, it remains a mystery even if we have some idea.

Subtleties of Dutch law ?
It seems that while the Air France-KLM group has full control over Air France, the Dutch state has voting rights without shares in KLM, a mechanism that could have facilitated the operation. In the absence of more information, we will lean towards this hypothesis for the moment.

When you know that KLM also refuses cash pooling that is to say the pooling of the treasury at the level of the group (which is indeed tremendous when one knows that the majority of the directors of the airline are appointed by the CEO of the group) and was notably marked by thethe Dutch government’s “aggressive” entry into the group’s capital several months ago, we can say that the long soap opera of the never consummated marriage is not over with a partner who fully assumes the future of his national but not his status of shareholder of the group.

Entry of the State in the capital of Lufthansa

At Lufthansa, the state’s help has also resulted, in addition, in the state taking a stake in the airline’s capital, which it had been absent since its privatization. An indirect entry because it is made through a vehicle that is the “Germany’s Economic Stabilization Fund” (WSF). The loans will be granted by the WSF and private banks.

However, this equity investment is not accompanied by any voting rights in order to maintain the entrepreneurial freedom of the business.

Minimum state service at IAG

Let’s take a look at IAG, parent company of British Airways and Iberia.

Iberia has received 1 billion in state-guaranteed loans from banks (750 for Iberia and 250 for its subsidiary Vueling). This decision came as a surprise, as the parent company IAG had previously announced that it would refuse any aid in which a state was involved. But let’s remember that as we explained at the time of the Brexit, if the capital of Iberia is held by IAG, the majority of voting rights are Spanish.

As for British Airways, it has just activated a credit line with the Bank of England up to 300 million pounds… guaranteed by the State.

But this will not be enough and to get through the crisis, instead of using public funds, IAG will proceed with a capital increase of about 2.5 billion euros. And in fact, the shareholder who has already announced that it will follow this capital increase is none other than Qatar through Qatar Airways which is already the largest shareholder of the group (25%) while neither the United Kingdom nor Spain is a shareholder in the airline nor does they intend to become one.

It should also be noted that the group renewed a multi-year partnership with American Express in July for $955 million. We’ll tell you one of these days how credit card issuers have helped the industry hold on in their own way.

Branson puts his hand in the pocket at Virgin Atlantic

In the absence of government support, Virgin Atlantic has turned to the private sector to find the £1.2 billion. This includes loans, concessions made by shareholders including Delta (which owns 49% of the airline), debt deferrals and, above all, $200 million that came directly from Richard Branson’s pocket!

Credit lines and fundraising for Singapore Airlines

As for Singapore Airlines, it got its hands on S$10 billion of liquidity (6 billion euros) on the markets by issuing new shares…a large part of which were snapped up by Temasek International, the sovereign wealth fund of the city-state which was already its main shareholder.

But a sovereign wealth fund is not a state, it is there to make money, not to do social work.

In addition, the airline has opened bank credit lines of S$500M.

States that secure a lot but spend little…for the moment

Finally, if the States have organized the aid, public money has not flowed into the coffers of the airlines.

They have mostly secured loans made by private banks, so technically they have not taken out a penny. This situation could change if the airlines are unable to meet their payments, which will probably be the case for Air France or even Lufthansa given the interest rates required. But there again nothing is lost, it is possible that the bank agrees to convert the debt into capital or that the debt is taken over by the state, converted into capital after some maneuvers which will make it a saleable asset when the situation is better and not a dead loss.

Sovereign wealth funds have also been involved. They are not social organizations, they are meant to make money and it is not public money as such.

There are also public investment banks that if they are there to make money accept to take risks to help the national economy.

Some of them have even succeeded in appealing to the markets and even to current shareholders who put additionnel money in, proving that this was not impossible. A solution that could have been explored by those who immediately went crying to the state. But it is also a question of culture and guarantees given by past management. IAG was perhaps more reassuring than Air France-KLM from this point of view.

And then there is the direct injection of liquidity by the States, therefore of public money, which remains very rare.

So contrary to popular belief, the arrangements invented have made it possible for the public authorities not to put too much money on the table to save the airlines and to intervene only in the second or third stage. It remains to be seen for how long.

Photo : Lufthansa aircraft grounded due to COVID by Markus Mainka via Shutterstock