Air France: freed, released…ready to counterattack?

Air France has finally reimbursed the state for the aid granted during the COVID and is finally free to participate in the consolidation of the market in Europe!

Air France handicapped by state aid

Like many European airlines, Air France needed government assistance to survive the COVID crisis. But this aid was not without conditions. Europe was indeed very vigilant to the fact that these aids only serve to pass the COVID period and do not constitute disguised subsidies.

For example, this aid was accompanied by certain obligations, such as a prohibition on taking more than a certain percentage of the capital of another airline or paying dividends.

These constraints are understandable from a competitive point of view, but they were beginning to become a handicap for the Franco-Dutch group. Indeed, the crisis has been followed by a consolidation movement in European airspace, a movement that was already expected and had begun before with the takeover of Air Europa by IAG, and which was only waiting for the return to normalcy to resume.

The problem was that while the other players in the market were freeing themselves from these constraints, Air France-KLM was slow to do the same and, while the takeover race was launched, remained stuck on the starting line.

This made it impossible for it to compete on equal terms in the ITA case, where Lufthansa overtook it in the final stretch. We are not convinced by all the explanations that followed, and we are almost certain that if Air France-KLM had been able to invest on its own to take control of the airline, it would probably have won, whereas the flawed set-up in which it was only a commercial partner while ITA wanted an industrial and strategic partner was destined to fail.

But this period is now over as the airline confirmed in a press release before yesterday.

– Air France-KLM has fully redeemed the balance of the French State’s perpetual hybrid bonds for a total of 300 million euros, and has proceeded with the payment of the French State’s compensation required for the shares subscribed in April 2021, without any change in the capital structure being required
– The Group has in fact refinanced 407 million euros through a new issue of perpetual hybrid bonds with the French State not subject to any constraints.

This is a real relief because in all honesty we initially had doubts about Air France-KLM’s ability to repay its aid. It was unrealistic for it to achieve this solely through the cash flow generated, and given the state of its finances at the beginning of the crisis, it seemed highly unlikely that it would be able to finance itself on the markets without having a reassuring financial health.

Well, we were wrong and that’s good. We will have the opportunity to come back to this subject on another occasion, but we would like to take this opportunity to salute the work of Ben Smith and his management team, who have not only managed to emerge from the crisis, but have also been able to clean up part of the situation he found when he arrived, which was the result of years of errors.

How did Air France-KLM fare?

This is not to say that Air France-KLM has reduced its debt: it has exchanged a debt with a constraint for another debt without constraint. Because if the terms of the press release are a bit technical, it is quite clear that the divestment was refinanced by a bond issue with the government.

The airline repaid the state by borrowing…from the state. All that changes is the nature of the debt obligations.

This is a perfectly normal maneuver, and it is in fact the same way that Lufthansa has proceeded by raising money on the markets. Same debts but different creditors and constraints. The only difference is that the German airline turned to the markets and Air France-KLM to the government. We will leave it to the financial analysts to comment on the subject, but this may be a sign that the health of one is more reassuring to private investors than the other. But it is also necessary to take into account the aversion of the German group for the interference of the State in its business which had almost led it to put itself ” self bankruptcy “ (a procedure similar to the American chapter 11) if the conditions required by the German State to help it seemed too constraining.

Air France ready to live up to its standing

Thus freed from its constraints, Air France once again has a free hand to participate in the consolidation of the market, an objective that Ben Smith had set for 2019 but which was undermined by the COVID.

It will also find Lufthansa and probably IAG in its path regarding the privatization of TAP, but this is a subject that will be discussed in its own time. But this is a strategic issue for Air France-KLM: after having missed ITA, it is the only “interesting” airline left on the market, and the foreseeable decline of the Schiphol hub requires the group to find a growth relay elsewhere.

Bottom line

Air France has finally been freed from the constraints linked to the aid received during the COVID and can now acquire other airlines. The airline continues the turnaround begun with the arrival of Ben Smith, turns the page on COVID and can fight with its competitors on equal terms.

Equal terms? This is the big question. Freed from its constraints does not mean that its finances, which were in poor condition when the current management team arrived, are healthy enough to compete with IAG and Lufthansa Group.

First element of answer during the privatization of ITA.

Image :B777 Air France by Lukas Wunderlich via Shutterstock

Bertrand Duperrin
Bertrand Duperrin
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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