Air France-KLM hobbled by state aid while rivals pounce on deals

Air France-KLM is coming under growing pressure to repay its pandemic state-aid packages quickly, as rivals including Lufthansa pounce on potential acquisitions in the aviation industry that the Franco-Dutch group will otherwise be barred from.

The French state, which recapitalised the airline group last year in a deal that constrains it from making purchases, is “looking closely” at financial options along with the company, said Jean-Baptiste Djebbari, France’s junior minister for transport.

“The issue [for the company] is whether it will manage, financially, to untie its hands quickly enough so that it can respond to market opportunities,” Djebbari said on Monday. The group needed to be “one of the major players” in a post-crisis world and in a possible wave of consolidation, he added, allowing it to compete with Lufthansa and other rivals such as International Airlines Group, the owner of British Airways and Iberia.

Germany’s Lufthansa, which has repaid its own state aid, and Swiss-Italian shipping conglomerate MSC last week expressed an interest in buying a majority stake in Italy’s state-owned ITA Airways, the successor to bankrupt Alitalia and part of the SkyTeam airline alliance along with Air France-KLM and Delta.

The Franco-Dutch group has no liquidity problems and would have been a natural suitor but was constrained by its bailouts, two people familiar with the matter said.

ITA’s slots at Linate airport, Milan, which feeds corresponding flights into Paris, made it particularly attractive, one of the people added.

Air France-KLM could yet consider ways of formulating an approach, with a promise to buy into the group further down the line, the person added, although Lufthansa and MSC have asked for an exclusive negotiation window with ITA for close to three months.

Air France-KLM received just over €10bn in state guaranteed loans and direct help from the French and Dutch governments when the pandemic struck in 2020.

A €4bn recapitalisation by the French state last year, through a mix of new shares and hybrid debt, constrains the group from taking more than a 10 per cent stake in any competitor until three-quarters of that aid is repaid.

The appearance of the rapidly spreading Omicron coronavirus variant at the end of 2021 derailed plans for an expected capital raising, which would have whittled down the state support.

But apart from business travel, air traffic is recovering, helping to restore Air France-KLM’s appeal to investors, and the group might also consider hybrid debt issuance, the people familiar with the matter said.

Air France-KLM, which is nearly 29 per cent owned by the French government and 9 per cent by the Dutch state, said it had “noted” Lufthansa and MSC’s ITA move and would “follow the developments in the coming weeks very closely”.