Air France-KLM’s Nordic foray gives boost to consolidation

 Air France KLM’s plan to buy a stake in troubled Scandinavian carrier SAS AB gives the long-overdue consolidation of European airlines a jolt as more regional operators come under the control of three big groups. 

The Franco-Dutch carrier said on Tuesday that it will invest as much as $144.5 million for 19.9% of SAS, with the option to take a controlling interest after two years. At the same time, the company reiterated its interest in Portuguese airline TAP SA, which the government has put up for sale. 

“The challenges of restructuring SAS are considerable, but if the team can square this circle, the rewards can be too,” analysts at Bernstein wrote in a note after the deal was announced. 

US Chapter 11 bankruptcy rules mean that existing SAS shareholders, including stakes held by the governments of Sweden and Denmark, will get wiped out. 

SAS stock fell as much as 96% when trading started in the Swedish capital on Wednesday, hitting an all-time low of 0.01 kronor. Air France rose as much as 2% in Paris trading.

Air France-KLM Chief Executive Officer Ben Smith is emulating a regional expansion championed by his two big rivals. IAG SA owns assets including British Airways, Iberia and Vueling, while Germany’s Deutsche Lufthansa AG has expanded south with Swiss and Austrian Airlines. 

The Franco-Dutch carrier previously owned a 25% stake in Italian flag carrier Alitalia Spa after the government placed the storied airline into bankruptcy. In 2017, Air France-KLM also agreed to buy a stake in Virgin Atlantic for £220 million as part of a three-way venture with Delta Air Lines Inc. It later dropped the plan in favor of an expanded trans-Atlantic partnership.

All three European majors are now actively engaged in deals. Lufthansa wants to buy a stake in ITA Airways, Alitalia’s successor, with a view to eventually adding the rest. IAG announced in February that it would seek to buy full control of Spanish airline Air Europa for €400 million, more than a year after the Covid pandemic and antitrust concerns scuttled a previous accord. 

TAP Interest

The airline groups are also circling around TAP, which promises lucrative connections to Brazil from Portugal. Portugal said late last month that it aims to sell at least 51% in the airline group.

Europe has long had a splintered aviation market, with many countries keen to retain a flag carrier. But high costs and competition from low-cost airlines like Ryanair Holdings Plc and Easyjet Plc have made such operations increasingly untenable.

In the US, the market is now organised around four major airlines: American Airlines Group Inc, Southwest Airlines Co., Delta and United Airlines Holdings Inc. In the budget market, JetBlue Airways Corp. has made a $3.8 billion bid to buy Spirit Airlines Inc., in what would make it the fifth-largest US carrier based on domestic passenger traffic.

SAS filed for bankruptcy in July 2022, after the Covid-19 pandemic disrupted travel, fuel prices rose and its pilots went on strike. As part of the deal with Air France-KLM, private equity firm Castlelake LP will also invest in the airline.

SAS was among a small group of independent airlines in Europe, which now include Finnair Oyj, Poland’s LOT and AirBaltic. Abu Dhabi carrier Etihad Airways PJSC tried its hand a few years ago at building equity stakes in European airlines, including Alitalia, Air Berlin Plc and Air Serbia, to funnel more traffic through its hub. The plan unraveled after losses mounted.