French state tightens grip on Air France-KLM with 29% stake

The French government strengthened its hold over Air France-KLM, using a new share issue to increase its stake to more than three times that of the Netherlands.

The struggling airline raised 1.04 billion euros ($1.25 billion) from investors, taking France’s holding to 28.6%, according to a statement Monday. China Eastern Airlines emerged from the sale as the second-biggest shareholder with 9.6%, while the Dutch state was diluted to 9.3%.

The stock fell as much as 3.6% in Paris and was down 2.7% to 4.90 euros as of 9:15 a.m., giving a market value of 2.1 billion euros. The new shares were sold at 4.84 euros apiece, with existing investors taking up about three-quarters of the issue.

France’s newfound dominance upsets a politically sensitive equilibrium with the Netherlands that lasted for about two years. The countries each held about 14% before the capital increase, which was part of a 4-billion-euro French rescue plan unveiled earlier this month to help the Air France side of the company through the Covid-19 pandemic.

The Netherlands declined to participate, and is considering its own support package. Talks are ongoing between the European Commission and the country for what could be the conversion of debt to equity, Air France-KLM Chief Executive Officer Ben Smith said earlier Monday. He also indicated more backing might be needed soon, saying a further recapitalization could be sought later this year.

France’s Finance Minister Bruno Le Maire has also left the door open for more support to the carrier should the French arm need additional help before the ongoing aviation crisis eases. While vaccines are being rolled out across Europe, progress is slow and the lifting of lockdowns and border restrictions is in limbo.

The proceeds from the latest share sale will be used to strengthen the French arm, the carrier said, while economic, financial and environmental commitments that are conditions of a state loan have been “reiterated.”

As part of the share issue, China Eastern and Air France-KLM reinforced their existing partnership. In terms of voting rights, the Asian carrier’s 11.5% will fall below the Netherlands’ 13.9%. Delta Air Lines Inc.’s stake slipped to 5.8%.

Uneasy Relations

The new shareholding structure upends a period of uneasy relations between France and the Netherlands over the carrier. The Dutch state stealthily acquired its stake just over two years ago, triggering a dispute between the European nations.

The move blindsided Paris and laid bare the Dutch intention to exert more influence on Air France-KLM. It will now have less clout.

The countries have often been at odds since the 2004 merger of their respective national airlines, with the Dutch arm long resenting French control. Air France also has weaker profitability than KLM and history of labor conflict.