Air France-KLM blow as the EU can learn from Nigeria

Dino D'Amore
By Dino D'Amore October 15, 2013 16:12

Air France-KLM blow as the EU can learn from Nigeria

The legacy of Silvio Berlusconi lingers on, and so Air France-KLM is left alone today wondering why it should punch a dirty great hole in its own cost-saving plan to save Alitalia – something the Franco-Dutch airline can ill afford right now, especially when it had all the right plans and intentions back in 2009 when it tried to take-over and sort out the Italian flag carrier before good old Bunga Bunga Silvio blocked the deal. The fact is that Air France-KLM dropped a clangor when it kept its 25% holding in the airline after the aborted and blocked purchase plan. The airline holds liability without the power to restructure the Italian flag carrier. The majority of Alitalia shareholders approved a €300 million ($477 million) capital increase as part of a €500 million bailout during the early hours of this morning during a board meeting that went all the way through the night. Poste Italiane Chief Executive Officer Massimo Sarmi will discuss the Alitalia business plan with Alexandre De Juniac at Air France-KLM today in Paris in a move to try and get Air France-KLM to cough-up some cash on top of the €323 million it paid for the 25% stake in 2009 that is now valued at €12.5 million excluding debt. As shares will be issued in Alitalia under the capital increase deal, Air France-KLM has little choice but to buy-in or see its 25% stake in Alitalia drop below 11%. Air France-KLM has been totally shafted overnight and is left in a real bind. If it does not provide the money, its shareholding will fall and it will lose its right to veto new shareholders, which could let in Aeroflot or the like. This is an advert as to why Etihad cannot invest in airlines without certain controls over its business – so far it has achieved controlling influence but it remains to be seen if this is the case with Jet Airways, which could yet turn out to be its own Alitalia.

Now Ryanair tried and failed to convince the European Commission that Alitalia is benefiting from state aid but the blunt truth is that it is. Italians have thinly disguised their state holding through Poste Italiane – Who are they kidding? Meanwhile poor Cyprus Airlines is being let by the European Commission to go to the wall. It is one rule for larger EU nations and another for the smaller ones it seems, and all this while Italy looks likely to breach EU budget deficit targets of 3% by some margin. Once again the EU airline market is being distorted by government interference and airlines that should have collapsed linger on troubling the bottom line of real airline businesses around them. Alitalia is being killed by easyJet and the like.

Investors have until November 15, 2013 to decide whether to buy new stock and at that point a new board will be appointed that it is hoped can start turning the airline into a viable business. UniCredit and Intesa Sanpaolo will guarantee as much as €100m for eventual un-opted rights in the capital increase, while the €100 million bridge-to-equity loan mentioned last week is still on the table also.

Air France-KLM management can be forgiven whichever way they turn in this saga as they cannot win, but they could look to increase their holding and try to purchase Alitalia at the expense of their own shareholders in the here and now. Air France will have one eye on who might be in the shadows for a stake in Alitalia and that would lead thoughts to the mighty Aeroflot.

Can Aeroflot pose a threat to European airlines?

Aeroflot, once the largest carrier in the world, has of late had much of its successful return to power owed to the Kremlin, which has actively supported the airline over recent years. Now with the low-cost arm Dobrolet, (the original name of the joint-stock company established in 1923 which preceded Aeroflot), the airline is in a position to march into Eastern and Central Europe with its 737-800s. The fleet of the new airline will consist of 737-800NGs in one-class configuration. In 2014 Dobrolet will stick to the large European cities inside Russia, cutting costs by up to 40% on connections with Moscow.

Aeroflot will invest around US$100 million over the first two years with fleet growth currently pegged at eight aircraft per year starting with eight initial aircraft in 2014. Vladimir Gorbunov, Director General of Dobrolet, intends to completely mirror the Ryanair offering which in the process requires some Russian regulatory changes that are expected to be formalised by the end of 2013 by the Kremlin.

Our sources state that Dobrolet will be in a very strong position to breakout of Russia towards Germany, Italy and the Middle East within three years but Aeroflot’s inability to gain a foothold stock holding in an EU based airline has at this time hampered long term expansion planning. Either way, eventually the Russians will be attacking the Eastern European airline market in the mid-term and it is unlikely that many existing carriers will be able to survive against such cash rich competition if Dobrolet is run well as a true low-cost carrier. The danger for the airline is that it fails to realise the advantage of low airport fees awarded to it inside Russia and this damages the carrier when it breaks into Europe. In a lesson to the EU and perhaps Indian regulators too and in a move that will impress lessors and the like, Nigeria is taking admirable the step of shutting down all/any airline that does not pay staff regular salaries. The move is backed by a comprehensive audit of all carriers that will soon be conducted to weed out financially distressed airlines and prevent them from operating. Now that is a good idea.

Additionally all Nigerian airlines will also be required to go through an IATA Operational Safety Audit (IOSA audit).

Dino D'Amore
By Dino D'Amore October 15, 2013 16:12
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