In exchange for €4 billion state aid, Air France increases Group capital by €1 billion and gives up 18 slots at Paris Orly

Air France-KLM announces a plan of capital-strengthening measures with the objective of strengthening its balance sheet, preparing the recovery and repositioning the Group on a sustainable financial trajectory

Air France-KLM (“the Group”) announces the following measures in relation to Air France, which have been approved by the European Commission in its decision to authorize a €4 billion French State measures to recapitalise Air France and its Holding company:

• A capital increase for an amount up to €1 billion, with a priority subscription period for shareholders, subject to market conditions and the prior approval on the prospectus by the Autorité des marchés financiers (the “AMF”) and,
• Simultaneously, conversion of the €3 billion French State direct loan drawn into perpetual hybrid bonds instrument.
• The Dutch State is continuing discussions with the European Commission regarding potential capital-strengthening measures for KLM.
• Additional measures to further strengthen the Group’s capital are currently under consideration, with several steps to be taken before the 2022 Annual General Meeting.

On April 5 the Air France-KLM Group’s Board of Directors approved a plan to start the restoration of the Group’s negative equity and further reinforce its cash position:

Capital increase with priority subscription period for shareholders

The Group intends to launch a capital increase subject to market conditions and the approval on the prospectus by the AMF.

This capital increase will be launched without preferential subscription rights but with a priority period for the shareholders, within the limits of the nineteenth resolution approved at the Annual General Meeting on May 26, 2020, allowing existing shareholders to not be diluted, by subscribing shares during the priority period up to their stake in Air France-KLM’s share capital. The offering will be composed of a private placement to institutional investors, a public offering and a priority period allowing all shareholders to support this transaction.

The French State commits to participate in the capital increase while keeping its stake strictly below 30% of the share capital and voting rights.

China Eastern Airlines intends to participate while keeping its stake strictly below 10% of share capital, as part of further reinforcement of strategical cooperation with the Group.

The Dutch State which holds 14.0% of the share capital, has informed the Group that it will not subscribe to this capital increase.

Delta Air Lines which holds 8.8% of the share capital, has informed the Group that it will not subscribe to this capital increase due to the current framework of the CARES act in place in the United States.

This operation will improve the Group’s equity by up to €1 billion under IFRS and French GAAP accounting standards, and bring the same amount of new money to the Group for the benefit of Air France.

Simultaneously, the fully drawn conversion of €3 billion French State loan into perpetual hybrid bonds instrument (“Super Subordinated Notes”):

The €3 billion direct loan provided by the French State to Air France via Air France-KLM late in May 2020 will be converted into Super-Subordinated Notes of the same nominal amount to Air France via Air France-KLM, allowing the Group to restore part of its equity under IFRS accounting standards.

This operation will improve the Group’s equity by €3 billion under IFRS accounting standards with no cash impact, while increasing the Group’s flexibility in its mandatory debt redemption profile spread over time (with Non Call period ranging from 4 to 6 years).

The Dutch State approved this set of actions and indicated that it was continuing discussions with the European Commission on potential capital- strengthening measures for KLM.

Together with the expected recovery in EBITDA, this first step of capital-strengthening measures will progressively help the Group to reduce the Net Debt/EBITDA ratio below 3.0x by 2023.

Additional measures to further strengthen the balance sheet are currently under consideration with several steps to be taken before the 2022 Annual General Meeting, as the Group’s net equity will remain negative after this first step.

These measures could include the issuances of appropriate amounts of new equity as well as proportionate quasi-equity instruments, subject to market conditions. The hybrid perpetual bond instruments fully subscribed by the French State and resulting from this first step recapitalisation could be used to compensate in part, by way of netting, to future equity and or quasi-equity raisings by the Group.

The objective of such additional measures will be to further reinforce the Group’s equity situation and reduce its Net Debt/EBITDA ratio circa 2.0x by 2023. In order to achieve this, specific delegations would be then required and submitted at the Group’s next General Meeting, scheduled on May 26.

Additionally, the French state-backed loan (Pret Garantie d’Etat “PGE”) of €4 billion has been extended with a final maturity date in 2023. The Dutch State-backed loan guaranteed loan of €2.4 billion has a maturity date in 2025. These elements enable smoothen the debt redemption profile of the group and the airlines a smooth extension of the debt maturity profile of the Group.

Commitments made in order to comply with the European Commission’s “Temporary Framework for State aid measures to support the economy in the current Covid-19 outbreak” (TF).

Air France-KLM will be subject to commitments made by the French government in order to comply with the European Commission’s “Temporary Framework for State aid measures to support the economy in the current Covid-19 outbreak” (TF).

These commitments, specifically paragraphs 60-61 and 71-78 of the TF,  include Air France’s release of up to 18 take-off and landing rights (slots) at Paris-Orly airport to a competing carrier in order to create or develop an existing base at that airport, provided that the competing carrier obtaining Air France’s slots bases its aircraft and crews at Paris-Orly airport, in compliance with national and EU labour laws. Other general commitments were made under the TF, including restrictions on acquisitions, share buy-backs dividend distributions and executive management’s remuneration. These commitments are applicable to the entire Group with the exception of KLM and its subsidiaries.

The Group has reiterated the economic, financial and environmental commitments made in the framework of the State loan and reflected in its transformation plan. The Group, therefore, maintains an ambitious environmental roadmap to accelerate the Group’s sustainable transition, in line with the objectives of the National Low Carbon Strategy (Stratégie Nationale Bas Carbone “SNBC”).

“Today’s announcement demonstrates both the strong commitment of the French State and the renewed support of the Dutch State to help the Group weather this pandemic and this crisis,” said Anne-Marie Couderc, Chair of Air France-KLM Board of Directors. “The commitment of our long-standing partner China Eastern Airlines to participate in the forthcoming capital increase also highlights a resolute confidence in the strengths and prospects of the Air France-KLM Group.”

“These first recapitalisation measures are an important milestone for our Group in this exceptionally challenging period,” said Air France-KLM Group CEO, Benjamin Smith. “They will provide Air France-KLM with greater stability to move forward when recovery starts, as large-scale vaccination progresses around the world and borders reopen. Ensuring Air France-KLM maintains a sustainable financial trajectory is paramount to realizing our strategic plan, continuing the execution of our transformation plans at the Group and at our airlines. I would like to thank our employees for their engagement and their responsibility throughout this crisis. We will continue to work together to drive new efficiencies as we seek to lower unit costs and emerge stronger when the industry rebounds with the ambition to achieve European leadership“.

Outlook for Q1

As expected, the Air France – KLM Group continued to be negatively impacted by the COVID crisis during the first quarter of 2021, notably by the surge of a third wave of the pandemic in several European countries and by the continuation of air travel restrictions taken by a significant number of countries.

Based on the accounting results of January and February and on the reforecast made at the end of each month, the Group expects the operating result for the first quarter of 2021 to be around EUR -1.3 billion, and EBITDA to be around EUR -750 million, below Q4 2020 EBITDA as indicated at full-year 2020 results presentation. It should be noted that in the first two months of 2021, operating result and EBITDA were significantly better than the Group’s budgeted assumptions, and capital expenditure was also 10% below budget over that period, reflecting the effective control introduced by management on CAPEX, allowing the Group to have a solid 8.8 billion euros of liquidity and credit lines at disposal at 28 February 2021.

Over the coming months, and in particular, at the beginning of the summer, the Group still expects a significant recovery in demand, assuming the positive effects of the accelerated vaccination campaigns in several countries could trigger less stringent restrictions on passenger travel across those countries.

State aid: European Commission approves up to €4 billion French measure to recapitalise Air France

The European Commission has approved French plans to grant up to €4 billion for the recapitalisation of Air France through its Holding company. The measure was approved under the State aid Temporary Framework.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “France will contribute up to €4 billion to reinforce Air France’s equity and help the airline face financial difficulties resulting from the coronavirus outbreak. At the same time, the public support will come with strings attached, in particular to ensure the French state is sufficiently remunerated, and further measures to limit distortions of competition. In particular, Air France has committed to make available slots at the congested Paris Orly airport, where Air France hold significant market power. This gives competing carriers the chance to expand their activities at this airport, ensuring fair prices and increased choice for European consumers.”

The French recapitalisation measure

Air France is a major network airline operating in France. It is owned by the Air France-KLM Holding company, in which the French state holds a 14.3% participation. With a fleet of over 300 planes, Air France plays a very important role in the French economy, in terms of employment and connectivity for many French regions including those overseas (Départements et Régions d’outre-mer “DOM-TOM”).

In 2019, the Air France-KLM airline group reported an annual operating profit of approximately €750 million. However, as a result of the travel restrictions introduced by France and by many destination countries to limit the spread of the coronavirus, Air France and its Holding company have suffered a significant reduction of their activities, leading to major operating losses.

In this context, France notified to the Commission under the Temporary Framework a recapitalisation of up to €4 billion of Air France and its Holding company. The recapitalisation by France, which is part of the first step of the recapitalisation plan of the group, comprises:

(i) the conversion of the €3 billion State loan already granted by France (approved by the Commission in May 2020 under case number SA.57082) into a hybrid capital instrument; and

(ii) a capital injection by the State , through the subscription of new shares in a share capital increase opened to existing shareholders and the market, in a limit of EUR 1 billion depending on the size of this operation.

KLM, the other strategic subsidiary of the Air France-KLM group, will not benefit from the aid. Among others, this is ensured by (i) the specific features of the aid instruments; (ii) the corporate and governance structure of the Air France-KLM group; and (iii) a commitment that relationships between Air France and its Holding, on the one hand, and KLM, on the other hand, will continue to be based on market terms.

The Commission found that the French measure is in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework. In particular, as regards:

• Conditions on the necessity, appropriateness and size of intervention: The capital injection will not exceed the minimum needed to ensure the viability of Air France and its Holding company, and will not go beyond restoring their capital positions compared to before the coronavirus outbreak.
• Conditions on the State’s entry in the capital of companies and remuneration: The recapitalisation aid will prevent an insolvency of Air France and its Holding company, which would have serious consequences on French employment, connectivity and foreign trade. The French State will receive an appropriate remuneration for the investment and there are additional mechanisms in place to incentivise Air France and its Holding company to buy back the State’s equity participation obtained as a result of the recapitalisation.
• Conditions regarding the exit of the State from the capital of the companies concerned: France committed to work out a credible exit strategy within 12 months after the aid is granted, unless the State’s intervention is reduced below the level of 25% of equity by then. If six years after receiving the recapitalisation aid, the State’s shareholding in the Holding is not significantly reduced in line with the Temporary Framework, a restructuring plan for Air France will be notified to the Commission.
• Conditions regarding governance: Until 100% of the recapitalisation is redeemed , Air France and its Holding company are subject to bans on dividends, non-mandatory coupon payments and share buybacks. Moreover, until at least 75% of the recapitalisation is redeemed (in line with the conditions under the Temporary Framework), a strict limitation of the remuneration of their management, including a ban on bonus payments, is applied. These conditions also aim at incentivising Air France, its Holding company and its owners to buy back the State’s equity participation obtained as a result of the recapitalisation as soon as the economic situation allows.
• Prohibition of cross-subsidisation and acquisition ban: To ensure that Air France and its Holding company do not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, they cannot use the aid to support economic activities of integrated companies that were in financial difficulties prior to 31 December 2019. Moreover, until at least 75% of the recapitalisation is redeemed, Air France and its Holding company are in principle prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
• Commitments to preserve effective competition: Air France will benefit from a recapitalisation measure above €250 million and holds a significant market power in Paris Orly airport, where Air France has a large presence. That airport is structurally highly congested, meaning that airlines cannot get access to the landing and take-off slots that they request for their operation at the airport. Therefore, in line with the requirements of the Temporary Framework, additional measures to preserve effective competition are necessary. These consist in Air France making available up to 18 slots per day at Paris Orly airport to a competing carrier. These measures will enable the lasting entry or expansion of a competing carrier at this airport, to the benefit of consumers. In addition, these measures require that the competing carrier obtaining Air France’s slots bases its aircraft and crews at Paris Orly airport, in compliance with national and EU labour laws.
• Public transparency and reporting: Air France and its Holding company will have to publish information on the use of the aid received, including on how the use of the aid received supports the companies’ activities in line with EU and national obligations linked to the green and digital transformation.
• Monitoring: A trustee, who will have to be appointed by Air France and its Holding before 5 May 2021, will monitor and ensure, under the Commission’s instructions, compliance with the different commitments. The trustee will report periodically to the Commission.

The Commission concluded that the recapitalisation measure will contribute to manage the economic impact of the coronavirus outbreak in France: the measure aims at restoring the balance sheet position and liquidity of Air France and its Holding company in the exceptional situation caused by the coronavirus pandemic, while maintaining the necessary safeguards to limit competition distortions. It is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the conditions set out in Temporary Framework.

On this basis, the Commission approved the measure under EU State aid rules.

6 April 2021 Brussels