Introduction

After the initial corona dip and my bearish article, where I advised not to buy Air-France KLM(OTCPK:AFRAF), the stock has vastly underperformed indexes and its competitors. In my latest article I wrote:

‘In my opinion, the risk-reward ratio of Air-France KLM is not worthy of any investor’s money; there are much better airlines available.’ ~Air-France KLM: Cheap But Very Risky

Both the French and Dutch government have finalized their plans to save respectively Air-France and KLM. But I remain bearish on the company, I will explain in this write-up why so.

KLM

KLM has received a bailout package for a total of 3.4 billion euros. €1 billion is a direct loan from the state, and the other €2.4 billion are loans from a group of banks, but these loans are guaranteed by the Dutch state.

But the Dutch government has multiple requirements to KLM:

  1. KLM needs to reduce influenceable expenses by 15%
  2. Employees who are paid above modal will have a reduced salary going forward.
  3. KLM needs to reduce its CO2 emission footprint. In 2030, the emission per passenger per kilometre should be reduced by 50%.
  4. KLM will operate fewer night flights.
  5. A government state agent can control at all times whether the funds of the state-aid are used appropriately.

The Dutch state agent is interesting since that implies the government does not trust the Air-France KLM holding. This state agent will make sure none of the Dutch funds will be used by the French airline Air-France, or used in other inappropriate ways, but is obvious that this state agent’s responsibility mostly includes making sure Air-France is not using the Dutch state-aid.

Air-France

Air-France has received a €7 billion bailout package from the French state, including both a direct loan from the governments and state-guaranteed loans from a group of banks. This state-aid has different requirements. As of writing Air-France is not planning to reduce salaries, but they are reducing the size of the company. 10% of Air-France pilots were allowed to leave with a lucrative package, and Air-France has the same CO2 emission goals as KLM.

Political chaos

The two different government bailout packages are a great example of the long term underlying issues of Air-France KLM. Both companies are not cooperating in an adequate way. In my opinion, this is a consequence of both nation’s attitudes. The Netherlands bought a massive stake in 2019, without even consulting the French government. This was clearly a hostile move. Now both governments are unable to create a similar bailout for the entire company, instead, they save their respective national airlines. Their bailout requirements are asymmetric, which can be seen as unfair to certain employees.

‘It seems like KLM is making bigger concessions to the state than Air-France’ ~Stefan de Vries, correspondent RTL Z on TV

KLM is forcing a reduced salary on a high number of employees, while Air-France is currently not, but they are planning to let go some employees, on a voluntary basis. This is a symptom of a gigantic underlying problem, everyone believes that the Air-France KLM marriage is a zero-sum game. If Air-France wins, KLM losses, and the other way around. People working at these companies, but also governments need to understand that Air-France and KLM need each other, it is not a zero-sum game. As I said in my previous article:

‘For Air-France KLM to succeed both airlines need to put their troubles aside and merge each other’s strength. However, it has been an unhappy marriage from the start ‘

Source: Seeking Alpha article Air-France KLM: Cheap But Very Risky

Air-France and KLM both win or both loss, the faith of both airlines is intertwined. Until that understanding arrives at both airlines, the project remains doomed to failure. I had a small amount of hope that the Covid-19 crisis might actually improve relations between both nations, a coordinated bail-out package could have been the start of a better relationship, but that failed severely.

Currently, the French and Dutch government are not even able to create symmetric bailout packages for both airlines. The Dutch government has such a massive distrust of Air-France KLM, that they need a permanent agent who controls whether Dutch funds will not be used by the French.

Conclusion

The European airline industry is set to change forever. Air-France KLM is in such political chaos, and until the relationship between both airlines improves the future of the holding looks grim. I recommend investors to buy wonderful airlines instead, but even the future of those airlines remain uncertain.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2020-06-30

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