Air France-KLM warns of deeper pain as fresh aid set to finally land

Struggling airline Air France-KLM warned there was more pain to come but is poised to seal another volley of state aid after recording a €7.1bn net loss in 2020 owing to the Covid-19 pandemic. The airline, created in 2004 by the merger of France’s flag carrier with the Netherlands’ own champion, said on Thursday it expected fresh aid to finally land in the coming weeks after months of talks.

The timing is more a question of days and weeks than quarters, so we are confident, said Frédéric Gagey, group chief financial officer, without being drawn on the size of the bailout involving equity or quasi-equity.

The protracted talks, with its two largest shareholders, the French and Dutch states, along with the European Commission, include the EU pushing Air France-KLM to give up aeroplane slots at Paris Orly and Amsterdam Schiphol airports in exchange for aid.

chief executive Ben Smith said, we are pushing to ensure that they are proportionate and comparable with what Lufthansa has released [to access state funds. So we are negotiating with the European Commission and we’re hopeful that we will have an agreement . . . In the short term.

Air France-KLM has already slashed thousands of jobs to cut costs, with the headline loss including restructuring charges linked to lay-offs with another 6,000 planned in the coming years. It has also taken on €10.4bn in state-backed loans. But after burning through €2.6bn in cash in the fourth quarter, the airline said the first three months of this year will be challenging and involve a deeper hit to earnings. Analysts view further help as necessary.

Daniel Roeska, an analyst at Bernstein said, the French and Dutch governments recognise the importance of airlines to their national economies and will maintain operations, but the scale of the hole in AF-KLM’s balance sheet is large, and incremental debt-carrying capacity so small, that a substantial dilution looks highly probable with few alternative ways out.

Roeska said, the carrier expects to fly just 40 per cent of its pre-crisis capacity in the first quarter as restrictions on travel keep people at home, a target ahead of expectations considering “what other network carriers are planning.

The group said its medium-term operating margin objective of 7 to 8 per cent was unchanged, but delayed. By the end of the fourth quarter, Air France-KLM had €9.8bn of liquidity and credit lines on hand, down from €12.4bn three months before. Its fourth-quarter net loss of €1bn was, however, less than what analysts had pencilled in. 

Over one year into the pandemic, the sector and its already stretched balanced sheets is now facing the prospect of another summer where tourists are unable to fly.

Smith said on Thursday that vaccine passports could help demand come back, although analysts remain cautious.

Roeska said, without a meaningful acceleration in vaccinations, we worry that European governments will not have enough conviction to remove penalising restrictions on air travel in time for summer travel testing airlines’ balance sheets, and their investors’ resolve.