April 3, 2020 / 9:01 AM / 2 months ago

Exclusive: Air France-KLM in talks on multibillion euro state-backed loan package

PARIS/AMSTERDAM (Reuters) - Air France-KLM is in talks with banks to receive up to 6 billion euros ($6.5 billion) in loans guaranteed by the French and Dutch governments, as the airline group braces for a sustained coronavirus shutdown, sources told Reuters.

FILE PHOTO: Logo of Air France KLM Group is pictured on the first Air France airliner's Airbus A350 during a ceremony at the aircraft builder's headquarters of Airbus in Colomiers near Toulouse, France, September 27, 2019. REUTERS/Regis Duvignau

The two states, which each own 14% of Air France-KLM, have paused a long-running boardroom feud to address the cash crunch, according to three people close to the discussions. But the crisis ultimately risks deepening their conflict, they said.

Details and amounts are not finalised and could change, the people said. Under the most likely scenario, Air France could get about 4 billion euros in French-guaranteed loans while KLM receives close to 2 billion backed by The Hague, two sources said.

The group has appointed BNP and Societe Generale to advise on refinancing, two of the sources said.

Both banks declined to comment.

“We are naturally in constant discussions with both governments,” an Air France-KLM spokeswoman said, declining further comment.

Governments around the world are scrambling to prop up airlines at risk of bankruptcy as the pandemic gathers pace, gutting travel demand and bringing traffic to a near-standstill.

The French and Dutch governments also declined to comment in detail on the Air France-KLM talks. Both countries have expressed willingness to offer financial help.

“We’ve been in discussions for a long period of time with KLM and Air France, and very specifically with the French state,” Dutch Finance Minister Wopke Hoekstra told Reuters on Wednesday. “It’s extremely important to help this vital company through these difficult times.”

Air France-KLM’s emergency borrowings would be a multiple of its depressed 2.12 billion-euro market capitalisation - reflecting the scale of the threat to major airlines and the steps being taken to save them.

The U.S. Senate approved a $58 billion bailout for the U.S. aviation industry on March 25, a day before Singapore Airlines received a $13 billion lifeline. Lufthansa is poised to receive billions in aid.

GUARANTEES

Loans destined for Air France and KLM would be backed by their respective governments, two people said, with the Paris package drawing on 300 billion euros in aid for companies pledged last month, with a 70% state guarantee.

Air France is in talks with potential lenders including Credit Agricole and Natixis, while KLM is likely to draw on existing relationships with Dutch banks, one of the sources said, adding that agreements were expected this month.

France is resisting demands from the banks for a higher level of state loan guarantees, according to the same people. By comparison, German rival Lufthansa is set to secure emergency funding with an 80% state guarantee.

Credit Agricole declined to comment, while Natixis did not respond to requests for comment.

Under EU guidelines loosened for the crisis, state-guaranteed loans must not exceed a quarter of 2019 revenue - 4.15 billion euros for Air France and 2.77 billion for KLM.

“Both governments are working to pump as much in as they can, as opposed to pumping as little in as they can,” said one source.

The French and Dutch governments remain at loggerheads over management and strategy at Air France-KLM, created by the 2004 merger between the two national carriers.

Frustrations exploded in March last year with the Dutch state’s surprise acquisition of a stake in the group, designed to match France’s holding and counter its clout.

A stalemate ensued in which the Dutch government has obtained none of the concessions it sought, while the value of its investment has fallen 60%. Group CEO Ben Smith’s push for greater integration has also largely stalled.

NATIONALISATION?

In the face of global crisis, talks between the governments have been “dynamic and transparent”, said one of the people involved. “The focus for all of us is saving our economies.”

But the loan spree would leave a debt-laden Air France-KLM in need of new capital when coronavirus disruption eases, two sources said, reviving tensions that could lead to separation.

The nationalisation of Air France “is one possibility among others that we’re not ruling out,” French Transport Minister Jean-Baptiste Djebbari said on Sunday. On the Dutch side, “several options are still being considered including a state-backed loan” or an equity investment, one source said.

Likely restructuring may stoke resentment at KLM, which has consistently outperformed Air France’s profitability while avoiding the strikes that have plagued its stablemate.

Both airlines have slashed flights by more than 90% and reined in costs with the help of government-funded furloughs. KLM, which employs 35,000 staff compared to Air France’s 45,000, is also cutting 2,000 positions permanently.

Slideshow (3 Images)

Company directors will have to “keep a sharp eye” on each carrier’s contribution to the recovery effort, said a Dutch source close to the board. “We will see.”

Uncertainty over the length and depth of the industry slump is further complicating the bailout, said one of the people close to the discussions.

The group is burning close to 700 million euros of cash per month, according to shutdown estimates by Citi analyst Mark Manduca, who expects Ryanair and Wizz Air to be the only major European carriers to avoid refinancing.

Reporting by Laurence Frost and Anthony Deutsch; Additional reporting by Arno Schuetze in Frankfurt, Toby Sterling in Amsterdam, and Gwenaelle Barzic, Leigh Thomas and Maya Nikolaeva in Paris; Editing by Pravin Char

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