Air France-KLM plans its move past state aid towards consolidation

Air France-KLM is studying options for raising new capital to repay state aid as the Franco-Dutch group seeks to free itself to take part in any airline consolidation, its chief executive said.

Ben Smith, the Canadian executive in charge since 2018, also said in an interview that the company would make a further push in integrating its airlines to find cost savings, overcoming some resistance from the Netherlands-based carrier KLM.

Air France-KLM on Thursday reported improved revenues and a lower-than-expected loss for 2021, as well as fourth-quarter operating income above pre-pandemic levels. It was bailed out to the tune of €10.4bn in 2020 when the coronavirus outbreak hit, including through direct French and Dutch state loans.

A first €4bn recapitalisation backed by the French state last year came with strings attached, including a ban on acquisitions. That condition is proving a hindrance now that major rival Lufthansa of Germany is circling Italy’s ITA and when the group might also want to look at investments in areas such as cargo or maintenance.

“We want to have the flexibility to participate [in consolidation] where it makes sense,” Smith told the Financial Times. The company was still deciding on the shape its recapitalisation of up to €4bn would take, however, and had “no gun to our heads” in terms of timing, he added.

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

Part of the overhaul has included shifting resources to low-cost carrier Transavia, which could form a greater part of an alternative “plan B” should external moves be off the table for a while, Smith said. This would include building up connections between French cities outside Paris, such as Nice, and other European capitals.

“We can’t stand these remedies and we’re doing everything we can to pay back the state aid as quickly as possible,” Smith said. “We are not totally hamstrung.”

Air France-KLM could still potentially look at ITA, the former bailed-out Alitalia, or consider a commercial agreement that could lead to taking an equity stake in the company further down the line, Smith said.

But the group would not “lose sleep” if one or two independent carriers, such as ITA, Norwegian or SAS were picked up by competitors, he added, saying that he did not see a scenario of a larger or more threatening takeover of a group like Ryanair materialising.

Smith has been pushing for greater cost savings between Air France and KLM, against a politically charged backdrop. The French state holds nearly 30 per cent of Air France-KLM, and the Netherlands 9 per cent.

KLM’s chief executive, Pieter Elbers, long seen as a defender of more independence for the Dutch carrier, is now set to leave by the middle of next year at the latest, and the group has started the search for a replacement.

Smith, who aims to lift depressed margins at the group, said recent steps such as joint aircraft orders across the carriers were a start.

“It’s so obvious that the true enemies of the group are Lufthansa Group and IAG [Britain’s Intercontinental Airlines], and when you see opportunities like this and they’re presented properly, it’s a no brainer,” he said.

Air traffic has begun to recover since the start of the pandemic but has yet to return to 2019 levels.

Air France-KLM, which like rivals suffered a setback at the end of 2021 when the rapidly spreading Omicron variant caused renewed travel restrictions, posted a €127mn loss in the fourth quarter. That was lower than a year earlier, however, and less than expected by analysts. Operating income came in at €178mn, higher than in the fourth quarter of 2019.

Asked whether rules that require airlines operating in the EU to be controlled by EU investors should be strictly applied following Brexit, Smith said the group would not be “holding back our efforts to make sure they are”.

The rules could create challenges for the likes of IAG or Ryanair because of their ownership structure, according to some analysts, although UK-EU trade talks on the matter are still going on.