France bails out AF-KLM: the price is sustainable change and emissions cuts

The French Government will grant Air France-KLM a total of €7 billion ($7.6 billion) in loans to help it through the Covid19 crisis, and longer-term may consider increasing its shareholding, the Franco-Dutch airline group said April 24.

However the aid comes with major caveats in respect of the airline group making significant efforts towards cutting emissions and greater sustainability.

Air France-KLM has seen its flight activity cut drastically since the coronavirus crisis began and expects it to remain at around 10% of 2019 levels for the coming months.

Air France-KLM will have access to a French state-backed loan of €4 billion granted by a syndicate of six banks, guaranteed up to 90% by the Government, repayable in 12 months, with two consecutive one-year extension options exercisable by Air France-KLM.

The group will also benefit from a direct loan of €3 billion from the French Government as a shareholder, to Air France-KLM, again repayable in four years, with two consecutive one-year extension options exercisable by Air France-KLM. France owns 14.3% of Air France-KLM while the Netherlands government holds 14%.

The company said the plan was still being finalised. Once air traffic returns and some idea of what the new “normal” looks like, the board of directors may consider selling new shares to raise cash, subject to market conditions.

“In this context, the French state has indicated its intention to examine the conditions under which it might participate in such an operation to increase its capital,” the company added.

Air France-KLM group has taken measures to preserve its cash. These included securing payment deferrals for social charges, taxes and payments to lessors and airports, earmarking further cost cuts, retiring some aircraft early, reducing capital expenditure plans and cutting senior executives’ pay. It would still need extra funding in the third quarter of 2020 to survive the crisis.

“This aid mechanism, which remains subject to approval by the European Commission, will enable the Air France-KLM group to provide Air France with the means necessary to meet its obligations by continuing its transformation in order to adapt in a sector that the global crisis will severely disrupt,” Air France-KLM said in a statement.

The Netherlands has also stated its intention to support KLM and “discussions to finalise the aspects and conditions of an additional aid are ongoing,” the group added.

“This exceptional support from the French government is not a blank cheque,” CEO Ben Smith also said in a video message to staff. “Faced with the upheaval the world is going through we are going to have to rethink our model immediately.”

Smith said the group’s transformation would now work towards one single priority of regaining economic and financial security as quickly as possible “in order to survive in this ferociously competitive marketplace in which we operate.”

Smith also pledged to focus on environmental transformation, reflecting calls for state aid to airlines to be contingent on greater efforts to improve sustainability.

“We must dedicate our efforts to imagining and implementing a more environmentally friendly aviation model,” Smith said. “I believe this crisis could have a silver lining.”

The group said it would finalize a transformation plan in the coming months, including economic, financial and environmental commitments and a review of Air France’s activities to adapt them to the new market reality brought about by the crisis. The company will have to strengthen its financial situation, the group said. It also pledged to include an “ambitious environmental roadmap to accelerate the group’s sustainable transition.”