UPDATE – On the day of its Annual General Meeting in Paris, Air France-KLM announced its long-awaited rights issue. The airline group plans to issue 1.928 million new shares and raise €2.256 billion in fresh capital, of which €400 million will come from French logistics company CMA CGM Group. Air France-KLM plans to raise 2.3 billion through rights issue.
The rights issue has been part of negotiations between the airline group, the French and Dutch governments, and the European Commission for more than a year. Air France-KLM announced its intention on numerous occasions in quarterly earnings calls, but as Chief Financial Officer Steven Zaat said in February: “We will only do a rights issue at the right moment.” Despite the current nervousness in stock markets, Air France-KLM now thinks it is the right moment to strengthen its equity position and balance sheet. The decision was taken last week. During today’s AGM, Zaat said that the group had negative equity of €-4.0 billion in March 2021 and still had to reimburse €3.3 billion in Covid-related aid from the French and Dutch states.
The rights issue for new shares of €1.17 per share is open to the French public only with a subscription ratio of three new shares for one existing share. Of the expected €2.256 billion in proceeds, €1.7 billion of Covid 19 recapitalization aid or TSS Etat that was received in 2021 will be repaid to the French state so that the group is no longer restricted by conditions set out by the government. The remainder will be allocated for the group’s net indebtedness. Together with the €10.8 billion in liquidity, Air France-KLM intends to repay more state aid in the coming quarters. In 2020, at the start of the pandemic, Air France received €7 billion in equity and state-backed loans. In April 2021, another four billion was granted as part of a recapitalization package, of which €3 billion in loans were converted into perpetual hybrid instruments. The carrier already has redeemed €500 million in December last year. Last week, the airline entered exclusive negotiations with Apollo Global Management over the sale of an engine pool of Air France.
The French government has said it will participate in the rights issue to maintain its share capital at 28.6 percent and remain the group’s largest shareholder. The participation will be done by offsetting €645 million in claims on subordinated notes from the April 2021 aid package.
Delta and China Eastern sell shares to CMA CGM
Delta Airlines and China Eastern Airlines, which have a share in Air France-KLM of 5.8 and 9.6 percent respectively, will participate on a cash neutral basis. They will sell seventy million shares to CMA CGM for €249 million. The logistics company is committed to purchasing new shares for a total subscription price that doesn’t exceed €400 million or nine percent of the Air France-KLM share capital. CMA CGM and Air France-KLM announced a ten-year strategic partnership on May 18 to jointly develop the air cargo market through a combined fleet. CMA CGM will also become a member of the Air France-KLM Group Board of Directors.
After the sale, China Eastern will keep a share of some three percent and Delta of some two percent. The sale of shares to CMA CGM by Delta and China Eastern is “allowing them to finance the exercise of the balance of their Rights by using the net proceeds of this sale (subject to rounding) for an aggregate amount representing €110,725,424.55.” French shareholder FCPE will also participate on a cash-neutral basis and sell part of its 2.4 percent share to CMA CGM. Dutch shareholder SPAAK, which represents KLM pilots, will also sell part of its 1.72 percent share.
Group CEO Ben Smith showed the new Premium Economy product for KLM that will be rolled out this summer. (Air France-KLM)
Delicate Dutch position
The Dutch government also intends to participate in the rights issue but only on a limited basis to protect its current share position of 9.3 percent. Participation is subject to approval from the Dutch parliament, which was informed of the plan on a confidential basis on May 17. Minister of Finance Sigrid Kaag says in a letter to parliament that the Dutch state has no intention to issue any new capital to KLM. The only reason it wants to participate with some €220 million is to protect its share position and public interests in the company, which without the support would dilute from 9.3 percent to just two percent.
In 2020, the Dutch state has supported KLM with €3.4 billion in direct and state-backed loans. In May, KLM repaid €311 million of a revolving credit facility. Kaag notes that despite the effects of Omicron, the financial position of Air France-KLM and KLM, in particular, has improved, in part thanks to payroll support. Kaag says that KLM doesn’t a further equity injection and is in a position to fulfill the €700 million in capital needs without state aid. KLM is keen to do so, as taking on more state aid would mean that the airline would be subject to terms of the European Commission, which include the sale of precious slots at its Amsterdam Schiphol base. For this reason, KLM formally withdrew a previous equity request for €1.3 billion in April.
A new equity injection would have been politically extremely sensitive in The Netherlands, with various factions in parliament opposing any state aid and demanding strict conditions and terms to which KLM must adhere. Sigrid Kaag that the €220 million is no state aid that is conditional to restrictions of the European Commission and fully meets the conditions set out in the 2020 aid package to KLM. This includes a fifteen percent reduction in operational costs plus some terms related to sustainability.
Parliamentary approval needs time, says minister Kaag, but she calls on both chambers of the Dutch parliament to pass the proposal as quickly as possible. If this isn’t possible, the government will inform Air France-KLM that it will not be able to participate in the rights issue. The subscription period for the rights offer starts on May 25 and closes on June 9. All parties involved have entered a lock-up period.
Air France is developing a new La Premiere First Class cabin (on the right) for introduction in late 2023. (Air France-KLM)
New cabin products
Group CEO Ben Smith used the AGM to give an update on the new cabin products at both airlines. KLM will roll out Premium Economy from this summer until the end of 2023 on its Boeing 787-fleet. The 777s will get a new Business Class in 2023 and 2024. Air France has just unveiled its own new long-haul Business Class and Premium Economy in a project that was two years overdue. The former will be retrofitted on all long-haul aircraft by the middle of 2023 and on newly delivered Airbus A350-900s from mid-2023, the latter is currently being rolled out on the Boeing 777-300ER fleet.
Smith said that Air France is developing a new La Premiere (First Class) cabin for introduction in the winter of 2023 and 2024. The new La Premiere will be rolled out on a bigger number of the AF fleet. Smith noted that there is a growing demand for luxurious products from travelers who swap their business jets for commercial airliners for environmental reasons.
Ben Smith also said that KLM and Martinair are looking at a successor to the four Boeing 747-400F full-freighters. The three -400Fs with KLM are some nineteen years old, the single one of Martinair even 32 years old. “They need to be replaced in the short term, so we are looking at what solutions there could be”, said Smith.
Air France will replace its medium-haul Airbus A320ceo family fleet only after 2026. The decision will be made between now and 2024. KLM, Transavia, and Transavia France have recently ordered 100 A320neo and A321neo aircraft. The exact split between the types can be made eighteen months in advance of the delivery, so no final decision has been made.
75 Percent of the shareholders present at the AGM approved the 2021 remuneration of Ben Smith of a combined €4.0 million, of which €1.1 million is an annual variable compensation and €2.0 million is long-term and only when 75 percent of all recapitalization measures have been repaid.
The AGM was the last for KLM CEO Pieter Elbers, who has been appointed CEO of IndiGo from October 1. During the meeting, KLM and Elbers were accused of greenwashing by Dutch environmentalist groups. They claim KLM is misleading customers by saying in advertisements and other campaigns that they can fly fully climate neutral while in reality they aren’t. The groups, who presented a lawsuit to Elbers after the AGM, intend to go to court to request a ruling.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.