Air France-KLM: recapitalization of 4 billion euros

The European Commission has approved the French state’s plan to grant up to € 4 billion in aid to Air France, per recapitalize the airline collapsed by the pandemic and the collapse of passenger traffic. In exchange, the airline will have to hand over 18 slots a day at Paris Orly Airport to a rival carrier. The recapitalization of Air France involves “the conversion of the € 3 billion state loan already granted by France into a hybrid capital instrument”, as well as a “State capital injection” through a capital increase “open to existing shareholders and to the market “, up to a limit of 1 billion euros, explained the European Commission in a note.

“France will contribute up to € 4 billion to strengthen the capital of Air France e help the company aerial ad cope with financial difficulties resulting from the Covid-19 epidemic. At the same time, public support will be provided with constraints, in particular to ensure that the French state is sufficiently remunerated, and further measures to limit distortions of competition “, explains the executive vice president of the Commission, Margrethe Vestager, responsible for competition. “In particular – he added – Air France has undertaken to make some slots available at the congested Paris Orly airport, where Air France has significant market power. This offers competing carriers the opportunity to expand their operations at the airport, ensuring fair prices and greater choice for European consumers. “

In 2019, the Air France-KLM airline group registered a annual operating profit of approximately 750 million euros. However, as a result of travel restrictions introduced by France and many destination countries to limit the spread of the coronavirus, Air France and its holding company have experienced a significant reduction in their operations, leading to significant operational losses. In this context, France notified the Commission under the temporary framework of a recapitalization of up to € 4 billion of Air France and its holding company.

The recapitalization by France, which is part of the first phase of the group’s recapitalization plan, includes the conversion of the state loan of 3 billion euros already granted by France in a hybrid equity instrument; and a capital injection by the State, through the subscription of new shares in a share capital increase open to existing shareholders and to the market, up to a limit of one billion euros depending on the size of the transaction. KLM, the other strategic subsidiary of the Air France-KLM group, will not benefit from the aid. The Commission considered that the French measure complied with the state aid rules and the conditions set out in the temporary framework. In particular, as regards the conditions on the necessity, adequacy and size of the intervention: the capital injection will not exceed the minimum necessary to guarantee the profitability of Air France and its holding company and will not go beyond the restoration of their capital positions compared to before the outbreak of the pandemic.

Aid for recapitalization – writes the Commission – it will prevent the insolvency of Air France and its holding company, which would have serious consequences for French employment, connectivity and foreign trade. The French State will receive adequate remuneration for the investment and additional mechanisms are in place to incentivize Air France and its holding company to repurchase the State holding obtained following the recapitalization. France also committed to developing a credible exit strategy within 12 months of granting the aid, unless state intervention is reduced below the level of 25% of equity by this date.

If six years after receiving the recapitalization aid, the State holding in the holding is not significantly reduced in line with the temporary framework, an Air France restructuring plan will be notified to the Commission. Until 100% of the recapitalization is redeemed, Air France and its holding company are subject to dividend bans, non-mandatory coupon payments and share buybacks. Furthermore, until the repayment of at least 75% of the recapitalization (in line with the conditions of the temporary framework), a strict limitation of the remuneration of their management is applied, including the prohibition of bonus payments. The conditions also aim to incentivize Air France, its holding company and its owners a repurchase the participation of the state obtained following the recapitalization as soon as the economic situation allows it.

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