Then there’s Air France-KLM, with two governments squabbling over bailouts and acting like they want a divorce.
By MC01, a frequent commenter on WOLF STREET:
On April 25, Boeing announced that the deal under which it would have bought an 80% stake in Embraer’s commercial aircraft division is off. According to the press release, “Boeing exercised its rights to terminate after Embraer did not satisfy the necessary conditions.” Boeing will pay penalties worth approximately $75 million and will wave all rights on the new turboprop regional airliner Embraer is currently developing.
Embraer Commercial had been valued at $5 billion when the deal was originally signed in 2019. But delays in getting the deal approved by antitrust authorities around the world (especially in Asia) and the present worldwide healthcare crisis have sunken its value. Was it wise for Boeing to spend billions of dollars in an M&A deal when it’s facing enormous challenges?
The Covid-19 pandemic hasn’t made the 737MAX fiasco go away. The aircraft still needs to be re-certified and fixed, and many airlines still haven’t negotiated compensation deals with Boeing. Costs are estimated to run at $19 billion. By comparison, developing the new 777X (in the flight and static test phases) has so far cost Boeing about $5 billion.
Boeing has already been urged by Akbar al-Baker, the Qatar Airways CEO, to develop a 777X freighter variant. In light of the high demand for freighters of all kinds in the present crisis and lack of interest by airlines for the passenger variant of the 777X (309 orders, of which 115 are from Emirates), Boeing had better listen to Mr. al-Baker.
Boeing is also reported to be working on two new aircraft: a modest upgrade of the venerable 767 (still in production as a freighter) and an aircraft dubbed “757-Plus,” which would be similar to the Airbus A321XLR. Neither is exactly bold, and neither has analysts nor airlines jumping up and down with excitement.
The two chief causes for this fiasco were the stop in new deliveries to Chinese customers during Q1 2020 (they have since started accepting new aircraft again except for those airlines tied to effectively bankrupt HNA Group) and the shutting down of several key vendors around the world, especially Alenia of Italy.
Financials for Q1 2020 are horrible. Revenues fell 26% year-over-year to $16.9 billion. It booked a net loss of $641 million and an operating cash flow of a negative -$4.3 billion
This makes the recent bond offering by Boeing all the more stunning. Boeing was able to raise an $25 billion on security markets and has announced it won’t seek any more funds from the Federal government nor from capital markets for the time being. The details of these bond issues will be released this week, but it seems Boeing was able to sell several maturities, the craziest being a 40-year note with a 4.625% yield above Treasuries.
At least Boeing can console itself that domestic air traffic in China is picking up at a careful albeit steady pace, that demand for their 737-800 freighter conversion is white-hot, and that countries like Australia, Thailand and Brazil are cautiously increasing the numbers of domestic flights.
European airlines have no such luxury; the IATA (International Air Transport Association) estimated they will lose $89 billion in revenues in 2020. This is due to two chief factors.
The first is a 90% drop in traffic all over Europe since the beginning of the Covid-19 crisis.
The second is uncertainty. EASA (European Aviation Safety Agency, the counterpart to the US FAA) is supposed to have a set of post-emergency rules ready next week, rules that would allow airlines to restart some regular services at first and that should be progressively amended as we leave the emergency behind us. But these rules are not ready yet, and to make matters worse, the EU, Norway, Switzerland and other European countries still haven’t agreed on how and when to reopen their borders.
Preparing for a new set of rules requires time, money and effort. For example, airlines would need to adapt their pricing to reduced capacity to be still able to break even. The more these new rules are delayed, the worse the situation will become when airlines are allowed to fly again.
Airlines are using desperate measures to force legislators and regulators into action, such as SAS threatening to “cut its workforce by up to 5,000 full-time workers.” SAS has no intention of firing 45% of its full-time employees just like that; even Ryanair, a company notorious for poor employee relationships, is looking at a 10-15% workforce reduction at most right now. But this is a stern warning: the more the new rules are delayed, the more catastrophic the damages. If European authorities and national governments continue to waste time, the damages may be even more serious than SAS has threatened.
And what better symbol for this Pan-European chaos than the conundrum faced by Air France-KLM? The two airlines merged in 2004 but their partnership was never easy, and in recent years relationships soured as KLM kept on becoming more profitable while Air France has struggled to keep costs under control.
And now, the two halves of the airline group and the Dutch and French governments are squabbling over bailouts.
The French government has extended to Air France, and Air France only, a €7 billion emergency loan without first consulting with the Dutch government and even the KLM management. The terms of this loan are not clear but it has been reported Air France will have to pay back €4 billion by June 2021. This looks to be impossible even in the best-case scenario and raises all sorts of questions, questions that neither Air France nor the French government seem keen to answer.
Dutch finance minister Wopke Hoestra decided to escalate the matter by saying that if the French government will only bail out Air France, so his own government will only bail out KLM. The bailout package for KLM is being negotiated but is rumored to be a State-backed loan in the €2-4 billion range, and to come with some iron clauses, such as resuming “at least 80% of pre-emergency flights” by Q4 2021 and penalties in case the airline cannot become at least financially independent over the following 2-3 years.
The Dutch government owns 14% of KLM (like the French government owns 14% of Air France), and it’s well possible that stakes will increase in the future. But a split between the two airlines in case of an outright nationalization will have to be carefully negotiated: Air France is dependent on KLM for services such as IT and maintenance of several models. The Dutch airline has also set up a French low-cost subsidiary, Transavia France, after Air France’s attempts ended in embarrassment such as JOON, which shut down in January 2019.
As more and more parts of the world enter post-emergency or “Phase 2,” the need for swift and bold decisions is becoming all the more evident: the world will belong to those that can make those decisions. By MC01, a frequent commenter, for WOLF STREET
The megaships of cruise lines turned from a revenue-generating asset into an expensive-to-maintain nightmare. Read… What U.S. Cruise Lines Are Up Against. And No Bailout Money
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