Last week, Anne Rigail, CEO of Air France, admitted to Europe 1 that the company would have to be recapitalized after the COVID 19 crisis since it has become too fragile. A logical announcement that was expected and that does not say anything we don’t know about the financial health of the business, but that is not without raising some questions.
Why does Air France need to be recapitalized?
There are several reasons why a business may need to recapitalize (i.e. increase its capital). Among them, the fact that the shareholders’ equity becomes less than half the amount of the share capital (without recapitalization, bankruptcy is inevitable) or to repay loans when the debt burden becomes unsustainable.
In the case of Air France, we can imagine that these criteria are otherwise both reached or will be in the near future.
This comes as no surprise and is not a discovery about the health of the business: with the impact of the COVID crisis and, on top of that, a second containment that has just started, the question was not whether to recapitalize but when.
As we said as soon as the Air France rescue plan was announced, the repayment of the loans granted by the State to the airline was already unsustainable in terms of its finances when the market was growing, so there was no chance that it would do so in a market in sustained crisis.
But the situation is not unique to Air France: you will soon see most if not all majors facing the same issue, except for Alitalia (well ITA…) which has regained its financial virginity during the summer.
So Air France will need fresh money. It remains to be seen from whom and how.
The government is the designated savior for Air France, except that…
To the question “how will you proceed?”, Anne Rigail remains evasive even if the answer is in the end of a rare evidence.
“As to where this money will come from, Anne Rigail remains unclear, but the French state is a “reference shareholder of the airline“ and holds 14.2% of Air France’s capital…“
It seems obvious but it is not that simple.
Anne Rigail is right to mention that the State is a “reference shareholder” but she’s wrong to add “of the airline”. And Europe 1 does the same, stating that the State holds 14.2% of the capital of Air France.
…The State is not a shareholder of Air France…
The State does not hold a single cent of the capital of Air France, the airline being a 100% subsidiary of the Air France-KLM Group.
If Air France wants to recapitalize, it can issue new shares, in which case its only current shareholder will subscribe to remain a 100% shareholder. It is only if Air France KLM decides not to subscribe to all or part of the shares that another shareholder, which may be the State or any other investor, could enter the capital of the airline.
Another strategy, if Air France does not repay its loans, would be to convert them into capital! But in this case, it would be the lending banks that would be in the capital of the airline (which in our opinion they do not want), not the State. Unless, by some sleight of hand, the State, as guarantor, pays the banks, substitutes itself for them, becomes a creditor of the airline and thus takes a stake in the capital of Air France… possible but twisted for the reasons we will explain.
We do not believe in the arrival of a new shareholder in the capital of Air France, whether it be the State or anyone else. This would complicate the governance of the group, which is already suffering enough from shareholder disputes at its own level between the French and Dutch governments to allow a similar mismanagement to take place in one of its subsidiaries. The State is a useful shareholder in times of crisis, but a poor strategist and even a liability when it comes to thinking like an entrepreneur. And then, why not, this would open the door to the arrival of the Dutch State in the capital of KLM and then the ship would become unmanageable, sailing from governance crisis to governance crisis.
So Air France will increase its capital and it is the Air France KLM Group that will provide the necessary liquidity. But with what money?
It is Air France-KLM that needs to be recapitalized, not Air France
Air France-KLM will therefore recapitalize Air France, provided it has the means to do so. Its financial health being only the sum of the financial health of its subsidiaries, one should not expect miracles (and all the more so since if KLM were to generate profits – which is not the case in the current crisis – the Dutch having obtained not to share the profits – cash pooling – they would keep their cash for themselves).
In short, Air France-KLM will have to recapitalize itself in order to recapitalize Air France (and surely tomorrow KLM). And there the mechanism is the same as for Air France except that it will be necessary to play with different interlocutors which are, among others, the French and Dutch States, Delta Airlines and China Eastern (except that France can see its shareholder’s loan converted into capital but that will certainly not be enough and will create an imbalance with the Netherlands)
If everyone puts their money where their mouth is to accompany the capital increase, all is well. But if this were not the case, the balance of power within the group would be disrupted. This leads to several questions
1°) Would the French and Dutch States accept not to be at parity anymore?
If not, could one of the two who would not want to follow the capital increase do so by blocking it so as not to be at a disadvantage compared to the other? We know that the Netherlands now wants to have as much weight as France, which it does not consider a “reliable” shareholder. One can imagine that, as with the KLM rescue plan, the Dutch state prefers to help its airline rather than the group, and prefers to invest in KLM’s capital rather than participate in a recapitalization of the group. Being vicious, this could even pave the way for KLM’s exit from the group, however risky it may be.
As for the participation of France in the recapitalization, which is thought to be inevitable, it would however be comical. When we know how much thethe government and its ecological considerations (among others) are a handicap for the recovery of Air France, that in doing so he looks like a pyromaniac firemanIt would be funny to see how he will justify an investment in a business that he is otherwise killing.
So we can have different scenarios depending on whether the two States follow in equal proportions, whether one lets the other follow and finds itself diluted but in exchange rises to the capital of its own national airline, or whether the disputes between States ruin the operation.
2°) What will Delta and China Eastern think?
Delta’s CEO keeps reminding us that when he invests in an airline it is to have an impact on its strategy, as we saw in the Alitalia case. Especially since the airline’s ambition to become the cornerstone of a network of non-alliance carriers has been clearly stated and we don’t think that COVID will question it, quite the contrary.
But to achieve this, it is necessary to weigh and therefore not to be diluted.
Does Delta have the means today to follow a capital increase? It’s hard to say. Would it tolerate being diluted to the benefit of one or two public shareholders? It depends in which proportions but it is hard to believe. Would this push it to leave the capital of Air France-KLM because it could not influence its strategy? Eventually, why not, which will not be without its own problems.
Is there another way?
Of course, Air France-KLM has other leverage than its historical shareholders to recapitalize itself, but it seems complicated.
Like Singapore or Norway, France can call on its sovereign wealth fund….except that, next to the examples mentioned, the BPI is a little too “State” oriented and, in terms of scope, is not in the same league.
Opening up to other funds? Given the state of the finances, this would open the door to so-called vulture or activist funds that would have demands that would be out of step with those of the shareholding states.
Raising money on the stock market? Very risky and unpredictable.
So yes, Air France will be rescued directly or indirectly and it will probably be by the State. But it will be anything but smooth sailing.
Photo : Air France headquarters by multitel via Shutterstock