Air France penalized by the EU in the long term

Air France’s recapitalization by the French state was validated by the European Union only after concessions were made. While much has been said about the slots the airline has had to give up at Roissy, there is another obligation that is likely to weigh on the airline’s long-term future.

Air France prohibited from acquiring equity interests

Indeed, the conditions imposed by the European Union include the following:

“In addition, until at least 75% of the recapitalization has been repaid, Air France and its holding company are in principle prohibited from acquiring a stake of more than 10% in competitors or other players in the same business sector;”

In other words, Air France won’t be able to take part in the inevitable future consolidation of the market, which will a priori take place without it.

A logical interdiction, but is it fair?

To explain this constraint, we need only look at the context: state aid must not distort free competition, so what is a priori aid contrary to the rules of competition must be compensated for by a measure favoring competition.

The same applies to slots at Orly, a saturated airport, where Air France has had to compensate for the aid received by making room for its competitors;

The same applies to the prohibition on acquiring a stake in another player in the sector. It’s would not be fair to see an aid that is a priori illegal (apart from compensation) being used to finance the takeover of a competitor!

However, this is the first time in recent memory that such a constraint has been imposed on an airline since the beginning of the health crisis. The Lufthansa Group, for example, has had to sell off a number of slots, but remains free to invest elsewhere if the opportunity arises.

This may be explained by the fact that Lufthansa has only had to face the European authorities once, as opposed to twice for Air France, and does not need to be recapitalized (in fact, it is starting to turn to the markets to pay off its debts quickly and free itself of certain constraints).

But we’ll be watching closely to see if the same constraints are imposed on airlines in similar circumstances in the future. [Edit: Lufthansa obviously had to deal with the same constraints].

A loss of opportunity for Air France

Is Air France losing much in the story? Yes and no.

No, because without the recapitalization that brought about this constraint, the airline was doomed to disappear. So it’s better to be alive and hobbled than dead.

No, because who’s going to invest in a sector that’s in the throes of collapse anyway?

While the first argument is valid, the second reflects a very short-termist view.

Even before the crisis, there was no doubt that consolidation in the airline industry was inevitable. If the crisis has postponed it, it has, in our view, made it all the more inevitable. As soon as things return to more or less normal conditions, and subsidies are reduced or ceased in some countries, some airlines will be too fragile to continue on their own, and will be easy prey for those who have managed to keep their finances on an even keel.

Because at the end of the story, if the potential buyers are in a much worse position than before, the targets are also worth a lot less, and can easily be bought “for scrap”.

By way of example, right at the start of the crisis, IAG announced its intention to put an end to the takeover of Air Europa, only to acquire the Iberian airline at half price.

In Europe alone, there are a host of mainly regional airlines that would be good acquisitions for one of the 3 majors (IAG, Lufthansa Group or Air France-KLM).

As Air France-KLM is ultimately excluded from this game until it has repaid 75% of its recapitalization, it seems doomed to be irreparably outdistanced by its two competitors which, moreover, during the crisis played the card of maximizing their margins where Air France-KLM had decided to maintain as many destinations as possible whenever possible.

Let’s be clear: Air France-KLM will not be able to repay its loans and recapitalization for much longer, and a new round of financing seems inevitable in the medium term. A new trick that will certainly involve the public authorities once again, as the airline’s situation, unlike that of its competitors, does not inspire enough trust to go to the markets for financing.

All this is not the fault of the crisis but of the pre-crisis situation, and Air France will be paying the price for a long time to come for its past mismanagement and for having often acted as a toy for the State. But that’s the past, and there’s nothing we can do about it.

A way out for Air France?

Can what looks like a penalty be adjusted? Various scenarios can be envisaged.

The conditions for the recapitalization of Air France state that “it is in principle forbidden“. In principle. Does this mean that exceptions are possible “in practice”? Perhaps in the name of safeguarding jobs, if Air France-KLM was the only possible buyer for a dying airline? With ifs…

“it is in principle forbidden to Air France and its holding company“. This means that KLM could now invest directly in another airline. But the chances are high that the same constraints will be imposed on the Dutch airline when it comes to its own recapitalization.

Through a partner? A joint venture “hiding” behind Delta or China Eastern?

Bottom line

We’ll see how the sector evolves and, in this context, whether the European Union relaxes its rules or whether legal experts come up with miracle schemes.

But in the meantime, Air France will be dragging its heels for the long term, and will be unable to take part in the market consolidation when it picks up again.

Image : A320 air France by Santi Rodriguez via Shutterstock