Pandemic Injects Politics Into the Air France-KLM Survival Plan

Air France-KLM’s future as a combined company will be put to the test as France and the Netherlands prepare for critical talks on bolstering the weakened carrier’s finances, according to the French transport minister.

The discussions will raise fundamental questions about the way the airline is structured and backed by the two countries, Jean-Baptiste Djebbari said in an interview. The governments pledged 10.4 billion euros ($12.2 billion) earlier this year to prop up the carrier’s pandemic-shattered finances, but will need to go further to ensure its survival.

“Do we really want an integrated company or not?” Djebbari, 38, said at his office in Paris. “Within a contract or integrated group, benefits have to be shared and equitable.”

Pandemic Injects Politics Into the Air France-KLM Survival Plan

The global health crisis has put further stress on already shaky relations between Air France-KLM’s two biggest shareholders. The slump in air travel and ensuing losses at the carrier have France and the Netherlands searching for a way to collaborate on a possible equity injection, just 18 months after a bitter and unprecedented spat.

In February 2019, the Dutch government revealed it had secretly amassed a stake to match France’s 14% holding, blindsiding Paris and laying bare its intention to exert more influence on Air France-KLM, a rival to British Airways owner IAG SA and Deutsche Lufthansa AG. The governments papered over their differences, but tension has remained.

Crisis Response

The latest dilemma follows a surge in virus cases that’s plunged airlines into renewed turmoil after a short-lived travel revival during the summer months. Air France-KLM Chief Executive Officer Ben Smith has said talks are ongoing with shareholders for a recapitalization because the state rescue package is only enough for less than a year.

The company is set to publish results Friday, but has already warned of “significantly negative” earnings in the second half after a record quarterly loss in July.

“What is now on the agenda is how the group can recover,” said Djebbari, a licensed business-jet pilot and former executive at Luxembourg-based operator Jetfly. “What will be the role of the states, and within its new strategy, what will be the capital needs, what kind of nationalization -- if that’s what’s needed -- and under what conditions.”

Strategic Importance

The scope of the questions facing Air France-KLM underscores the sweeping nature of the crisis for governments and carriers alike. Lufthansa, which owns former national carriers in Austria, Switzerland and Belgium, avoided insolvency with a 9 billion-euro multi government bailout.

The French state’s support for Air France-KLM won’t waver even if the recovery in air travel only comes gradually, Djebbari said, citing its “extraordinary” strategic and geopolitical importance. French Finance Minister Bruno Le Maire has stood by the struggling carrier in saying the state would guarantee Air France’s survival, while his Dutch counterpart has been more circumspect.

The Netherlands has taken longer in granting loans and guarantees to KLM than the French did for Air France, leaving open the question of how much money each state is willing to plow into the airline and whether the Dutch will be on board.

“Whether the Dutch state, as shareholder of both the holding company and KLM, will participate in the capital increase depends on the request, the situation and the conditions,” Dutch Finance Minister Wopke Hoekstra said to Bloomberg. “We will review in due time whether we will again take part.”

The minister, who in Sepember said Air France-KLM’s survival “is not a given,” declined further comment on the scope of the discussions with the French government, saying any possible new request for support will be discussed with the company in private. Hoekstra is expected to decide this week whether to accept KLM’s cost-cutting plan that’s linked to the 3.4 billion-euro Dutch portion of the bailout.

Bad Blood

The challenges of reaching a political deal are magnified by years of bad blood between the two units, which came together in a 2004 tie-up. KLM has long resented French control, Air France’s weaker margins and history of labor conflict.

In the interview, Djebbari said KLM has benefited more than the French arm over the past decade from being in the group because of support it received from the Netherlands at its Schiphol hub in Amsterdam.

“Air France-KLM isn’t quite a group, few of its operations are shared and the Dutch have lots of power,” he said. “The question is what should we do and what we want to do together.”

As transport minister, he has taken particular interest in the airline industry because of his background. After aeronautical engineering studies in Toulouse, home of Airbus SE, Djebbari did stints at France’s civil aviation regulator and as an expert for the courts.

Pandemic Injects Politics Into the Air France-KLM Survival Plan

Four years ago, just as he was pushing ahead with a plan to create a regional airline, he met then-economy minister Emmanuel Macron and threw his hat in the electoral ring, winning a seat in parliament in 2017.

There he led an effort to overhaul the loss-making and heavily indebted state railway SNCF -- a bastion of labor strife that has proven to be a deep trap for a string of political leaders.

The pandemic could have a lasting effect on public transport systems including trains and subways because people may end up working more from home, Djebbari said.

Similarly, with cutbacks in Air France’s loss-making domestic services and low-cost rivals leaving regional airports, some areas of France could be left without connections that are vital to their economies.

Domestic travel is “a real political subject,” he said.

©2020 Bloomberg L.P.

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