Exclusive: Air France-KLM in talks about a government-supported loan package worth several billion euros

PARIS / AMSTERDAM (Reuters) – Air France-KLM is in talks with banks to obtain loans guaranteed by the French and Dutch governments of up to 6 billion euros ($ 6.5 billion) as the Airline group prepared for an ongoing coronavirus shutdown, sources told Reuters.

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

Details and amounts have not yet been finally clarified and could change, it said. In the most likely scenario, Air France could get around € 4 billion in French guaranteed loans, while KLM would get close to € 2 billion backed by The Hague, two sources said.

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

Both banks declined to comment.

“We are of course in constant talks with both governments,” said a spokeswoman for Air France-KLM and declined further comments.

Governments around the world are scrambling to prop up bankrupt airlines as the pandemic gains momentum, travel demand dwindles and traffic nearly grinds to a halt.

The French and Dutch governments also declined to comment in detail on the talks between Air France and KLM. Both countries have agreed to offer financial aid.

“We have been in talks with KLM and Air France for a long time, and specifically with the French state,” said Dutch Finance Minister Wopke Hoekstra on Wednesday to Reuters. “It is extremely important to help this vital company through these troubled times.”

Air France-KLM’s emergency loans would be many times their depressed market cap of € 2.12 billion – reflecting the magnitude of the threat to the major airlines and the steps being taken to rescue them.

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

GUARANTEES

Loans for Air France and KLM are backed by their respective governments, two people said, with the Paris package including € 300 billion in aid to businesses pledged last month with a 70 percent state guarantee.

Air France is in talks with potential lenders such as Credit Agricole and Natixis, while KLM will likely fall back on existing relationships with Dutch banks, one of the sources said, adding that agreements are expected this month.

France is resisting banks’ demands for higher government loan guarantees, the same people say. For comparison: the German competitor Lufthansa is to secure the emergency financing with an 80 percent state guarantee.

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

According to the EU guidelines relaxed for the crisis, state-guaranteed loans may not exceed a quarter of 2019 sales – 4.15 billion euros for Air France and 2.77 billion euros for KLM.

“Both governments are working to pump as much as possible instead of pumping as little as possible,” a source said.

At Air France-KLM, which emerged from the merger of the two national airlines in 2004, the French and Dutch governments disagree on management and strategy.

Frustration exploded in March of last year when the Dutch state surprisingly took over a stake in the group that was supposed to match France’s stake and counteract its clout.

A stalemate has occurred in which the Dutch government has not received any of the concessions it requested, while the value of its investment has fallen by 60%. Group CEO Ben Smith’s efforts to achieve greater integration have also largely stalled.

NATIONALIZATION?

In view of the global crisis, the talks between the governments were “dynamic and transparent”, said one of the participants. “The focus for all of us is on saving our economies.”

But the credit frenzy would leave a debt-laden Air France KLM in need of new capital if the coronavirus disruption wears off, two sources said, reinvigorating tensions that could lead to a breakup.

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

A likely reorganization could fuel resentment at KLM, which has consistently outperformed Air France’s profitability while preventing the strikes that plagued its stable mate.

Both airlines have cut their flights by more than 90% and cut costs with the help of government-funded vacations. KLM, which employs 35,000 people versus 45,000 at Air France, is also permanently cutting 2,000 jobs.

The company’s directors need to “keep a close eye on” each airline’s contribution to the recovery effort, said a Dutch source close to the board. “We will see.”

Uncertainty about the length and depth of the industry slump made the rescue operation even more difficult, said one of the interviewees.

According to shutdown estimates by Citi analyst Mark Manduca, who believes Ryanair and Wizz Air are the only major European airlines avoiding refinancing, the group is burning almost € 700 million in cash a month.