Air France-KLM wants to free itself from acquisition bans

Air France-KLM wants to free itself from acquisition bans “as soon as possible” by reimbursing state aid as it plans to raise 4 billion euros in new capital.

Ben Smith, the Canadian executive in charge since 2018, told the Financial Times that the Franco-Dutch group was also pursuing a “plan B” of industry consolidation, with a push to expand its low-cost routes.

In addition, it aims to further integrate airlines in the search for cost savings, overcoming some resistance from Dutch carrier KLM.

The plans were revealed as the group reported improved revenue and a lower-than-expected loss for 2021, with fourth-quarter operating profit above pre-pandemic levels as long-haul flights resume .

The airline said it was considering options for raising up to €4 billion, including a rights issue and quasi-equity debt issues, which would help repay state aid.

“We want to have the flexibility to participate [in consolidation] where it makes sense,” Smith said, adding, however, that the band had “no gun to their heads” in terms of timing.

Air France-KLM shares fell 5% to 4.27 euros on Thursday mid-morning in Europe in response to capital increase plans that would greatly dilute shareholders, analysts said.

Air France-KLM received €10.4 billion in support in 2020 when the coronavirus outbreak hit, including through direct loans from the French and Dutch states. A €4 billion recapitalization was backed by Paris last year, which included a ban on acquisitions.

It stifles expansion plans in areas such as freight or maintenance and is proving a stumbling block at a time when German rival Lufthansa is encircling Italy’s ITA Airways.

Smith has sought to rekindle ties with French unions as part of efforts to restructure Air France, the struggling partner of the group formed by the merger with KLM in 2004 and which cut nearly 8,000 full-time jobs in over the past two years. The group aims to return to profitability in its French market by 2024.

Part of the overhaul included shifting resources to low-cost carrier Transavia, which could form a bigger part of an alternative plan if external moves remained irrelevant, Smith said. This would include building connections between French cities outside of Paris, such as Nice, and other European capitals.

“We do not support these lawsuits and are doing everything we can to repay state assistance as quickly as possible,” Smith said. “We are not totally paralyzed.”

Air France-KLM could still potentially consider ITA, the former bailed-out Alitalia, or consider a commercial deal that could lead to a stake in the company later, Smith said.

But the group would “not lose sleep” if one or two independent carriers, such as ITA, Norwegian or SAS, were taken over by rivals, he added, saying he did not see a bigger takeover scenario. or more threatening from a group such as Ryanair materializes.

Smith pushed for greater cost savings between Air France and KLM, in a politically charged context. The French state holds nearly 30% of Air France-KLM and the Netherlands 9%.

KLM chief executive Pieter Elbers, long seen as an advocate of greater independence for the Dutch carrier, is now due to leave no later than the middle of next year.

Smith, who is aiming to lift the group’s depressed margins, said recent moves such as joint aircraft orders between carriers were a start.

“It’s so obvious that the real enemies of the group are Lufthansa Group and IAG [the owner of British Airways]and when you see opportunities like this and they’re presented correctly, it’s a no-brainer,” he said.

Air traffic has started to recover since the start of the pandemic but has yet to return to 2019 levels. Air France-KLM’s transatlantic capacity could exceed pre-pandemic levels by the third quarter of this year, Smith said.

Air France-KLM recorded a loss of 127 million euros in the fourth quarter. That was less than a year earlier, however, and less than analysts expected. Operating income amounted to €178 million, higher than in the fourth quarter of 2019.

Asked whether the rules that require airlines operating in the EU to be controlled by European investors should be strictly enforced post-Brexit, Smith said the group would “not hold back our efforts to ensure they are”.

The rules could create challenges for IAG or Ryanair because of their ownership structure, some analysts say, although trade talks between the UK and EU have yet to be finalised.

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