Air France, the French flag carrier and a subsidiary of the Air France-KLM Sponsored ADR (OTC: AFLYY), is receiving a $4.7 billion injection from the French government to repair the carrier’s financial health, which has been severely dented during the COVID-19 pandemic.
What Happened: The European Union signed off on the agreement with several significant strings attached: Air France must relinquish 18 slots per day at Orly, Paris’ second largest airport; a ban on dividends, share buybacks and executive bonuses; and a commitment of transparency showing how the funds are being used, including how it supports obligations linked to the EU’s green and digital transformation.
The French government owned a 14.9% share in Air France before this agreement was reached and will now command a 30% stake. Air France posted an $8.4 billion loss in 2020 and is projecting an operating loss of $1.53 billion for the first quarter of this year.
KLM, the Netherlands’ flag carrier that has a business alliance with Air France, will not benefit from this assistance.
Why It Matters: While the airline industry has suffered during the pandemic, flag carriers are able to receive financial intervention from their federal governments. Some notable examples include Deutsche Lufthansa AG (OTC: DLAKY), $9.8 billion in May 2020 from the German government; SAS AB (OTC: SASDF), $1.37 billion from the Swedish and Danish governments; Aer Lingus, owned by International Airlines Group (OTC: BABWF), an $180 million loan from the Irish government; El Al Israel Airlines Ltd. (OTC: ELALF), $120 million from the Israeli government last month; and TAP Air Portugal’s ongoing efforts to get $553 million in aid from the Portuguese government.
The privately-owned Ryanair Holdings plc (NASDAQ: RYAAY) brought a lawsuit to the EU General Court, arguing that government bailouts of flag carriers violate the EU’s rules on state aid. However, the court ruled in February against Ryanair, stating these actions were an appropriate response to a potential economic calamity. Ryanair said it would appeal the case to a higher EU court.
(Photo by Leaderofthewave / Wikimedia Commons.)
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