AirFrance KLM Is The First European Airline To Secure A Sizable Government Rescue Package Of 7-11 Billion Euro

Air France and their dutch sister KLM have managed to come to a deal with their respective governments and secured a rescue package of at least 7-11 Billion Euro from the French/Dutch Government.

The Netherlands are also in final talks to supply a further 2-4 Billion to KLM bringing the combined sum to 10-11 Billion Euro in the form of loans and guarantees to survive for the next year or so.

Currently pretty much all major airlines are appealing to the governments of their home countries to provide them with financial resources to avoid the carriers to fold under financial pressure during the Coronavirus traffic collapse.

Reuters reports the French government has already agreed to a 7 Bln funding package for Air France.

Air France-KLM secured 7 billion euros ($7.6 billion) in French government aid on Friday, as the airline industry struggles to survive the coronavirus crisis that has all but halted passenger traffic across much of the world.

France will issue 3 billion euros in loans as well as 90% guarantees on another 4 billion in bank lending to Air France, Finance Minister Bruno Le Maire said. The Dutch government said it was preparing a further 2-4 billion euros in aid to KLM.

In a video message to staff, Chief Executive Ben Smith said the aid was “not a blank cheque” and would require tough action on costs and performance.

Dutch Finance Minister Wopke Hoekstra gave a briefing within an hour of his French counterpart’s to announce the KLM aid still awaiting approval, and said there would be a “conversation” among shareholders on a future capital increase.

“We have repeatedly said that as the government we will do all that we can to help KLM through this crisis,” Hoekstra said, citing its “vital role” in the Dutch economy.

The French state-guaranteed funding comes in the form of 4 billion euros in loans from a syndicate of six banks with a 12-month maturity, and a four-year, 3 billion-euro direct state loan. Both facilities can be extended twice by one year and are subject to EU approval.

It’ll be very hard to attach and control hard conditions to these funds considering companies such as Air France are already very streamlined and most of their problems (and costs) in recent years stem from union related labor action and concessions by the company.

Without cutting down on labor and the very generous benefits in France there is no chance that Air France can reduce their costs and improve results, especially considering the current market situation. These loans are a lifeline to Air France, not an investment that will eventually pay off.

Other carriers are still fighting for survival and try to negotiate financial aid with their governments. The UK government still hasn’t confirmed any aid to British Airways or Virgin Atlantic, the latter of which is now seeking a sale of the company until the end of March if no support if forthcoming.

The Lufthansa Group has already confirmed that without state aid in some form or the other the company is essentially toast and no longer has liquidity. In order to safe Lufthansa and their subsidiaries Germany, Austria, Belgium and Switzerland need to come up with a sizeable amount of money as well that will far exceed that of Air France KLM.

Meanwhile the U.S. government was the first to bring a $25 Bln financial aid package for the aviation industry on the way but for a much larger group of airlines – I doubt it will be enough in the long run.

Conclusion

The ever repeating problem of airlines having to be bailed out with public funds prompts the question if the aviation business model which operates solely on advance payments without any guarantees and reserves is still adequate and justifiable.

While I believe that eventually every country will provide some form assistance to their largest carriers it should be considered that in the future airlines have to pass a stress test similar to banks and maybe also institute a fund that secures the money deposited by customers through ticket purchases in advance of receiving their service.

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