Air France-KLM rejects talk of breakup

Air France-KLM Chief Financial Officer Frederic Gagey has rejected any talk of a breakup of the Franco-Dutch carrier, saying the decade-and-a-half-old union will help the company get through the Covid-19 health crisis.

Splitting the French and Dutch arms wouldn’t benefit either side, Gagey said in an interview Friday with Bloomberg. He added that he didn’t understand how anyone could think it would, despite tensions that have periodically sprung up.

“The cooperation, in spite of what you read here and there, is extremely deep,” Gagey said. “The two teams work together on a daily basis in excellent conditions.”

Gagey was responding to comments from French transport minister Jean-Baptiste Djebbari, who told Bloomberg News this week that the airline’s future as a combined company will be tested by talks on injecting needed equity.

The discussions between top shareholders France and the Netherlands will raise fundamental questions about the way Air France-KLM is structured, the minister said.

The company’s shareholding structure is complex, giving the Dutch side some independence, and a bitter spat erupted between the nations when the Netherlands stealthily amassed a stake to match that of the French government. While there can always be improvement in they way Air France and KLM work together, they cooperate daily, Gagey said.

Air France-KLM warned Friday of a worsening outlook for the company and the industry amid a resurgence of the pandemic in Europe. That’s built pressure on both governments to find agreement on a recapitalization.

“One day or another we’ll have to solve the question of the equity of the group,” Gagey said. “We’re working on it, but it’s a ultimately a discussion and a decision of the main shareholders.”

Cost-cutting plan rejected

However, the Netherlands has since rejected a cost-cutting plan put forth by Air France-KLM’s Dutch arm and withheld a portion of a €3.4 billion government bailout until it approves the restructuring plan.

The Dutch government won’t grant a second tranche of state aid because pilot union VNV rejected a pay cut, Finance Minister Wopke Hoekstra and Infrastructure and Water Management Minister Cora van Nieuwenhuizen wrote in a letter to parliament on Saturday.

“It’s up to KLM and the unions to ensure that the required conditions will be met,” they said.

The Dutch government had linked the funds to KLM taking steps to improve profitability and competitiveness, including through wage cuts. All unions accepted a pay cut except for the pilot union, KLM stated earlier on Saturday.

The decision sends KLM back to the drawing board if it wants to receive more cash from the package of loans and guarantees.

It also comes at a sensitive time for Air France-KLM as a whole, whose two biggest shareholders, France and the Netherlands, are preparing for critical talks on further bolstering the airline’s weakened finances.

The Dutch finance minister has pushed for cuts in KLM’s structural costs, which he deemed too high even before the health crisis erupted.

Management had reached a deal with the Dutch pilots’ union VNV to cut an annual bonus and future pay increases through March 2022, but that accord angered cabin-crew unions because pilots also asked for more flight perks on business class.

KLM has drawn down €942 million euros total from the direct government loan and credit facility, and Hoekstra told parliament last month the government wouldn’t make a second tranche available until it’s satisfied with the cost-cutting plan.

The French have been faster in getting Air France a €7 billion rescue package that also came with some strings. French Transport Minister Jean-Baptiste Djebbari said in an interview that Air France-KLM’s future as a combined company will be put to the test during the talks with the Dutch on a possible further recapitalization.

European airlines including rival Deutsche Lufthansa AG have turned to government aid in a bid to survive the travel slump caused by border restrictions and consumer reluctance to fly.

Air France-KLM Chief Executive Ben Smith has said talks are ongoing with shareholders for a recapitalization because the state rescue is only enough for less than a year.

While French Finance Minister Bruno Le Maire has said he would guarantee the survival of Air France, his Dutch counterpart Wopke Hoekstra has been more circumspect, saying “this is about tax money, so it is not a foregone conclusion.”

Capacity slashed

The Franco-Dutch carrier also will slash its schedule this quarter as European governments implement tough new measures to combat a resurgence of Covid-19 infections, with Air Franceto offer less than 35% of year-ago capacity and KLM about 45%. That’s well below a previous forecast of 65% for the Paris-based group.

The carrier blamed a lack of demand and the French government’s decision to implement a new lockdown barring people from traveling except in extenuating circumstances.

That will lead to “substantially lower” results than the third quarter’s €442 million loss before interest, taxes, depreciation and amortization, Air France-KLM said.

Leisure travel had picked up for Air France-KLM and its peers during the summer months when infection levels dropped. But the surge in cases since then has put the brakes on any recovery.

British Airways owner IAG also reported results on Friday, after warning last week that it would operate no more than 30% of its usual schedule. State furlough programs and outright job cuts helped keep costs down, but the airline group declined to give a full-year forecast. Lufthansa has previously said it will target a maximum of 25% capacity this quarter.

The industry has been clamoring for an easing of travel restrictions, but the latest moves by France and Germany to curb movement suggest more pain.

The third-quarter net loss at Air France-KLM narrowed to €1.67 billion from the prior three-month period, when the first wave of the pandemic struck. The results include restructuring charges for staff departures.

French arm Air France has accelerated a job-cutting plan to include the equivalent of 8,500 positions through 2022, it said Friday, adding that Dutch unit KLM plans to eliminate as many as 5,000 workers in 2020. At the end of September, Air France-KLM had €12.4 billion of liquidity and credit lines at its disposal.