It’s the surprise announcement of the week: Air France-KLM is about to take a 19.9% stake in SAS with a view to an industrial and commercial partnership. An announcement that naturally raises many questions about the outcome of this operation and what it could lead to.
The announcement
A brief, more intelligible summary is provided below.
The announcement came late this afternoon from Air France-KLM
[..] Air France-KLM Group, Castlelake, L.P., on behalf of certain funds or affiliates, and Lind Invest ApS (collectively, the “Consortium”) have, together, been selected as the winning bidder in SAS’s exit financing solicitation process.
The Consortium’s investment proposal remains to be finalized and is subject to certain conditions and regulatory approvals including, but not limited to, approval by the European Commission, the US court overseeing the Chapter 11 reorganization and, in respect of SAS AB, the Swedish court.
Should this transaction be approved and all the other conditions (including regulatory clearances and cancellation of all existing shares of stock of SAS AB) be satisfied, the Consortium, together with the Danish State, would invest USD 1.175 billion of which USD 475 million in common shares and USD 700 million in the form of secured convertible bonds.
Air France-KLM’s investment would represent a total of USD 144.5 million, of which USD 109.5 million would be invested in common shares and USD 35 million would be provided in the form of secured convertible bonds. Upon completion of the transaction, Air France-KLM would own up to a maximum 19.9% non-controlling stake in the share capital of the reorganized SAS AB.
Air France-KLM’s investment described herein will not have any impact on the Group’s medium-term outlook.
In parallel to the transaction, and subject to the satisfaction of certain conditions including SAS AB’s exit from Star Alliance, Air France-KLM will seek to establish a commercial cooperation between its airlines and SAS AB. In doing so Air France-KLM will strengthen its footprint in Scandinavian markets, where the SAS brand and loyalty program are well-established. Such commercial cooperation would benefit Scandinavian customers through extended connectivity and broader access to the worldwide network of Air France-KLM.
Definitive agreements between the members of the Consortium would include specific provisions whereby Air France-KLM’s stake may be increased such that Air France-KLM may become a controlling shareholder, after a minimum of two years, subject to among other things, certain regulatory conditions and financial performance.
The SAS website is more explicit on certain subjects.
As a result of that process, all of SAS AB’s common shares and listed commercial hybrid bonds are expected to be cancelled, redeemed and delisted (currently expected to occur during the second quarter of 2024). Consequently, no value is expected for existing shareholders in SAS AB and only a modest recovery is expected for the holders of commercial hybrid bonds.
In parallel to the transaction, and further to its joining of SkyTeam, SAS AB will seek to establish a commercial cooperation with Air France-KLM and its airlines (subject to customary approvals), to the benefit of Scandinavian customers through increased connectivity.
Key points from Air France-KLM’s SAS announcement
In plain English, this means
– A consortium comprising Air France-KLM and investment funds takes control of SAS, with Air France-KLM taking a 19.9% stake.
– The transaction will be finalized following approval by the relevant authorities.
– The aim of this agreement is to promote commercial cooperation by increasing Air France-KLM’s presence in Scandinavia and offering SAS customers access to the Franco-Dutch group’s global network.
– The establishment of this cooperation means that SAS is leaving Star Alliance to join Skyteam.
– Air France-KLM may take control of SAS after two years if certain conditions are met, including those linked to the airline’s financial performance.
– SAS shareholders will gain nothing from the operation.
If all this seems quite clear, there are still many questions to be answered, not least because of the suddenness of this operation.
What happened?
Debt-ridden and subject to Chapter 11, SAS has taken on debt with the Apollo investment fund, which has been working with Air France-KLM for some time on a number of issues. Unfortunately, the airline’s situation continued to deteriorate (particularly as Northern European airlines are more affected by the strike in Ukraine and the impossibility of flying over Russia), and it had to agree to convert the loan into an equity investment.
However, Apollo, an American fund, could not hold more than 49% of a European airline, so it asked Air France-KLM to join the bidding round.
Subsequently, agreements between the various shareholders will eventually enable Air France-KLM to take sole control of SAS.
Was Air France-KLM the only one in the running?
What we do know is that several funds were interested not in the takeover but in refinancing SAS, and we have no way of confirming or denying that they were allied with an airline.
On the other hand, we have always been convinced that Lufthansa would never let an airline other than its own get its hands on SAS. For historical reasons of German commercial influence in the region, because both airlines are founders of Star Alliance, and because the modest size of SAS enabled LH Group to have a strong presence in the region’s main airports to supply its hubs, whereas Air France and KLM’s presence was much more modest.
So even if Ben Smith had mentioned the subject at the last Paris Air Forum, we didn’t see this move coming at all, and certainly not so quickly.
With the little we know today, we can assume that it was “just” a financing project that became a takeover because Air France-KLM is very close to Apollo, and other airlines may not have seen it coming.
Or maybe Lufthansa already had enough on its plate with ITA?
Or because it’s saving itself for TAP?
But we admit that Lufthansa’s absence from the project is something of a surprise to us, and a subject we’ll certainly be looking at in greater depth in the near future.
What’s the impact on customers?
Access to the Air France-KLM network for Scandinavian passengers, better access to Scandinavia for others – sounds good on paper, but it’s not exceptional either.
While SAS’s network is infinitely smaller than that of Air France-KLM, which would mean that this is good news for Scandinavian passengers, we’re not so sure that they’ll be able to benefit from the Star Alliance’s exit.
Let’s put it bluntly: they’ll be leaving an alliance with a huge footprint in Europe, with a number of premium airlines in Europe and especially in Asia, to join one with the least attractive network and the fewest attractive airlines.
Knowing both airlines’ frequent flyer programs equally well, we can safely say that the Eurobonus member is not going to like the Flying Blue qualification criteria at all. No more than he would have liked Miles&More’s, in its current form and even more so in its future one.
Suffice to say, there’s bound to be blood on the walls here.
While some will see the advantages, we are not sure that this will be a real revolution for the customers of either airline, and that in the long run the Scandinavians may even lose out.. Except, perhaps, for Scandinavians who have Flying Blue as their main loyalty program….we promise you that it exists, but it’s not very common, just like the French who have Eurobonus as their main program (but those, on the other hand, can look really gloomy tonight).
A master stroke by Ben Smith
If this isn’t the deal of the century for customers, it certainly is for Air France-KLM, and to a lesser extent for SAS.
The Group is thus acquiring an airline that is not in great shape, but which has a huge domestic network that works very well (the topology of Scandinavia makes air travel compulsory on many routes), a good reputation, is twice the size of ITA which it missed out on, has three hubs, and all this without breaking the bank and limiting its ability to position itself on the TAP deal.
We’ve already spoken highly of Ben Smith’s tenure at the helm of Air France, and once again we can only bow to this coup.
As for SAS, what it gains is survival. It’s not as glamorous, but it’s something.
Can the operation fail?
We don’t see what could derail the deal. Air France-KLM is not big enough, especially in Scandinavia, for this to raise competition issues.
Action by shareholders who could feel cheated? You never know.
Slow progress on SAS’ exit from Star Alliance? It will certainly take time.
Economic performance below expectations? This may prevent Air France KLM from taking control of the airline, but it won’t change the fact that SAS has changed owners.
Massive rejection by staff? They’re probably relieved to have saved their jobs, but who knows…
Challenges remain
However, there are still a number of points that need to be addressed, and addressed well, for the deal to work.
First, there will be a cultural challenge. The marriage between Air France and KLM was a disaster in terms of the compatibility of business cultures. In this case, even though SAS and KLM came close to merging in 1993 (along with Swiss and Austrian), and even though Air France-KLM’s top management is much less French than it used to be, there’s a real potential time bomb. Let’s be clear: we don’t see Swedes, Danes or Norwegians accepting French-style management or its political games. Add to that swallowing one’s pride to go under a foreign flag…
Then there are the customers. The way Eurobonus will be handled and the transition to Flying Blue, which is thought to be inevitable, could also be very painful for SAS customers! And a passenger who sees years of loyalty ruined is not a passenger you’re going to keep for long.
Finally, this completely reshuffles the cards on the TAP dossier and the balance of alliances in Europe, but we’ll have a chance to talk about that when the time comes.
Bottom line
Air France-KLM pulls off a masterstroke by acquiring a stake in SAS, before possibly taking control. The Scandinavian airline will be leaving Star Alliance to join Skyteam.
An excellent deal for Air France-KLM, provided it doesn’t get its feet stuck in the integration carpet, both for the airline and its customers.
But there’s no doubt that there will be plenty to say on the subject in the future.
What about you? What do you think of this operation? Do you think the graft will work? Tell us in the comments.
Image : A320 SAS by Photofex_AUT via Shutterstock
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