COVID-19 prompts dramatic increase in state aid to (some) European airlines

Summary:

• Lufthansa has a EUR9 billion state aid package, including a 20% equity stake for Germany. Other Lufthansa Group airlines are also taking aid.
• Air France-KLM has received significant government support. Among Europe's big three legacy airline groups, IAG has received the least state aid.
• Alitalia, airBaltic, Finnair and SAS are also recipients of equity investment.
• Other airlines benefiting from state loans and/or guarantees include Aeroflot, Norwegian, TAP Air Portugal, Condor and Aegean Airlines.

Germany's Economic Stabilisation Fund (WSF) has provided Lufthansa with a EUR9 billion state aid package approved by shareholders and the European Commission.

The package includes EUR5.7 billion of silent participations by WSF, of which EUR4.7 billion is classified as equity under accounting standards since it is unlimited in time (but can be terminated by Lufthansa on a quarterly basis).

The WSF has also taken a 20% stake in Lufthansa's shares through a capital increase of EUR300 million. It may increase this stake to 25% plus one share if the company is taken over. Provided Lufthansa repays the silent participation in full, the WSF will sell its shareholding in full by 31-Dec-2023.

The package also includes a syndicated three year credit facility of up to EUR3 billion, provided by state bank KfW and private banks.

Lufthansa has agreed to waive future dividend payments and to give two seats on its supervisory board for government representatives. There are also restrictions on management remuneration.

The European Commission (EC) required that Lufthansa should transfer up to three daily slot pairs per aircraft, for up to four aircraft, to one competitor at each of Frankfurt and Munich (a total of 24 individual slots at each airport).

This will be available for one and a half years to European new entrants that have not received substantial state aid, with existing competitors able to take the slots if new entrants do not.

These are meaningful concessions, but will still leave Lufthansa as the dominant operator at both of its leading hubs.

According to CAPA calculations based on OAG data for the week of 03-Jun-2019, these concessions are 2.6% of Lufthansa's slot holding at Frankfurt (where it had 62.2% a year ago) and 3.5% of its sots at Munich (where it had 58.6%).

If they were all taken by a competitor, that new entrant would rank fifth by slots at both Frankfurt and Munich.

Other Lufthansa Group airlines are also in line for state assistance.

SWISS and its subsidiary Edelweiss Air are to receive CHF1.5 billion (EUR1.4 billion) in five year loans guaranteed by the government of Switzerland for 85% of the value.

The loans are secured by shares in SWISS and Edelweiss held by Lufthansa and funding may only be used for the two Swiss airlines in the group. No dividend payments within the group are allowed for the duration of the loan.

Austrian Airlines, the Lufthansa Group and the Austrian government have agreed on the structure of a EUR600 million aid package for Austrian Airlines, approved by the EC. As part of the agreement, Lufthansa invested EUR150 million in Austrian Airlines' equity.

The group's Belgian subsidiary, Brussels Airlines, is to receive a EUR290 million loan from the Belgian government, subject to EC approval. Lufthansa will supplement this with a EUR170 million equity investment in Brussels Airlines.

The aid provided by the governments of Switzerland, Austria and Belgium is subject to the final approval of the WSF and KfW and will be offset against the stabilisation package for Lufthansa.

Air France-KLM has also received significant government support.

The two major airlines of the group both have EC-approved state aid packages.

Air France has received a EUR7 billion package from the French government.

France is guaranteeing up to 90% of a EUR4 billion loan from a syndicate of six banks to Air France-KLM and Air France. The loan is for 12 months, with two consecutive one year extension options exercisable by the group.

In addition, the French state is providing a direct loan of EUR3 billion to Air FranceKLM, with a four year maturity and two consecutive one year extension options.

France owns 14.3% of Air France-KLM and may participate in any new equity issue by the group.

The government of the Netherlands, which owns a 14.0% stake in Air France-KLM, has provided a EUR3.4 billion aid package to KLM.

This consists of a EUR2.4 billion bank loan, 90% guaranteed by the Dutch state, and a EUR1 billion direct loan from the government to KLM.

As conditions of their state aid packages, both Air France and KLM are required to make cost reductions and commit to environmental targets around carbon emissions (and Air France is to cease short haul routes where train journeys of less than 2.5 hours are available).

KLM must reduce night flights.

In addition, Air France must impose a salary freeze for all employees in 2021 and 2022, while KLM must adjust labour conditions for those earning above a certain threshold (under discussion with unions).

France's Minister for Finance Bruno le Maire, via Twitter, has said that state aid will see Air France manages through until at least the end of 2020.

Moreover, if traffic does not recover, Air France "will be able to count on the support of the state …we will be there for [the company] and if we need to raise capital, we will do so".

Among Europe's big three legacy airline groups, IAG has received the least state aid.

By contrast with Lufthansa Group and Air FranceKLM packages totalling double digit billions, IAG airlines have had just EUR1.3 billion in state loan guarantees.

British Airways took a GBP300 million loan, while Iberia and Vueling took EUR1 billion in loans, all from schemes backed by their respective governments (the UK and Spain) that were not airline sector-specific but available across the economy.

Russia's government has included Aeroflot in a list of "backbone companies" eligible for additional support to mitigate the impact of the pandemic.

Prime Minister Mikhail Mishustin signed a directive on the provision of RUB70 billion (EUR865 million) in state guarantees for loans to the company.

Aeroflot announced in late Jul-2020 plans to open a non renewable RUB31 billion (EUR356 million) credit line with Sberbank, with state guarantees.

The airline is considering boosting its capital through new equity, a possibility supported by the Russian government provided that it maintains its 51.17% stake.

Italy's government has renationalised Alitalia, making a capital injection of EUR3 billion.

This followed a EUR400 million bridging loan to the airline earlier this year, part of a total of EUR1.5 billion in loans since Alitalia entered administration in the spring of 2017.

The crisis ended all likelihood to find a buyer after three years of trying and so the Italian state took the opportunity to renationalise Alitalia. The government's industrial plan for the airline reportedly targets a fleet of 65 to 70 aircraft, compared with 111 currently recorded in the CAPA Fleet Database (at 10-Aug-2020).

It has also been reported that it aims to achieve breakeven in 2022 and a profit in 2023.

To put this aim in context, Alitalia has not reported a profit at any time in the 21st century, even when the world airline industry was making record margins in the period 2015-2019.

It will be a massive challenge for it to reach its breakeven target in the aftermath of aviation's worst ever crisis.

In Jun-2020 the EC approved a Portuguese government loan of EUR1.2 billion to TAP Air Portugal, which had been experiencing financial difficulties even before the pandemic.

The loan aims to give TAP breathing space to prepare a long term plan to ensure its viability. The airline must reimburse the loan or submit a restructuring plan within six months.

As conditions for the loan, the Portuguese government requires TAP shareholders David Neeleman and Azul to sell it their stakes in the airline (held through the Atlantic Gateway consortium).

Portugal's take will increase from 50% to 72.5%, while 22.5% will continue to be held by Humberto Pedrosa and 5% by TAP employees.

The government of Finland has provided Finnair with a guarantee for 90% of the value of a EUR600 million pension premium loan (the balance is guaranteed by a commercial bank).

This has been approved by the European Commission.

Finnair also completed a EUR500 million rights issue in Jun-2020 and Jul-2020, which included a pro rata participation by Finland, which has a 55.9% stake.

At the end of Jun-2020 SAS announced a recapitalisation plan supported by its three largest shareholders, namely the governments of Sweden (current stake 14.8%) and Denmark (14.2%) and the Knut and Alice Wallenberg Foundation (KAW, 6.5%).

The plan aims to increase SAS equity by SEK14.3 billion (EUR1.4 billion), with SEK12 billion (EUR1.1 billion) in new funds and the remainder in the conversion of existing debt.

It is subject to approval by the EC and by shareholders at an EGM in late Aug-2020. Moreover, finer details of some of the terms are still in negotiation.

The total investment by the two government shareholders will depend on the outcome of the rights issue element of the plan, but is likely to be around SEK4.1 billion (EUR400 million) by Sweden and SEK5.1 billion (EUR500 million) by Denmark.

Both governments will increase their equity stake to around 20% after the recapitalisation.

In addition to the plan, Norway is paying SEK500 million (EUR48.7 million) in commercial agreements with SAS to maintain certain levels of network capacity.

In early May-2020, SAS agreed a SEK3.3 billion (EUR310 million) three year revolving credit facility, 90% guaranteed by the governments of Sweden and Denmark. The facility was approved by the EC and provided by a consortium of Scandinavian banks.

Norway's government has provided a NOK3 billion (EUR275 million) state guaranteed loan to Norwegian Air Shuttle.

As a condition of this aid, Norwegian increased its equity capital by swapping NOK12.7 billion (EUR1.2 billion) of its liabilities to lessors and bond holders into equity and issuing NOK400 million (EUR38.1 million) of new shares.

This process left the company in the control of lessors, which now own more than half of the equity, and bondholders. Previous shareholders are left with only around 5% of the equity.

AerCap has 15.9% of Norwegian's equity, BOC Aviation has 12.67%, Avolon has 5.5% and DP Aircraft Ireland has 5.02%.

The Latvian state has invested EUR250 million in the equity of airBaltic, taking its stake in the airline from 80.05% to 91%.

The investment has been approved by the EC, but the approval requires recovery of the investment in five to seven years and penalties if this is not achieved. airBaltic is considering plans for a share issue to private investors, possible on a much shorter time scale.

The airline plans a reduced fleet, resuming operations with 22 Airbus A220-300s, growing back to up to 50 aircraft by the end of 2023.

According to the CAPA Fleet Database, airBaltic has a total fleet of 34 at 10-Aug2020. This includes 12 Dash-8 turboprops, which the airline does not intend to return to service.

The government of Iceland has said it is not planning to take an equity stake in Icelandair Group.

However, at the end of Jul-2020 the group said that talks about a state guarantee for a loan to be provided by two Icelandic banks were at an advanced stage. The loan will be conditional on a new share offering planned by Icelandair in Aug-2020.

Romania's government is finalising details of aid for TAROM and Blue Air, subject to EC approval and restructuring plans.

The government could reportedly provide state guarantees totalling RON600 million (EUR124 million) to the two airlines. In the case of TAROM, this would build on a temporary rescue loan provided by Romania earlier this year.

Other Central European governments are also ready to support their national airline.

Croatia's government will reportedly support Croatia Airlines, whose search for a strategic investor is currently suspended. The Polish government has also indicated that it will support LOT Polish airlines. The Serbian government is considering renationalising Air Serbia by buying back Etihad's 49% stake.

In Germany, Lufthansa has not been the only beneficiary of state support.

Leisure airline Condor Flugdienst has EUR550 million of state aid from the German Government and Hessian State Government.

They each committed to providing loan guarantees to Condor after the collapse of its planned acquisition by Polish Aviation Group (owner of LOT Polish). The European Commission has granted approval.

Condor, previously part of the now bankrupt Thomas Cook Group, will receive EUR294 million in coronavirus protection aid, as well as EUR256 million for refinancing of the carrier's existing bridging loan.

In addition, TUI Group secured a EUR1.8 billion state aid bridging loan from KfW earlier this year. As a condition, TUI must suspend dividend payments.

In Aug-2020, the leisure group reached agreement for a further EUR1.2 billion of state aid. This consist of an additional loan of EUR1.05 billion from KfW and investment of EUR150 million by WSF in a convertible bond.

The UK has not provided sector-specific financial support to airlines, but has established its Covid Corporate Financing Facility for all sectors.

In addition to UK companies, this is available to foreign companies that make a material contribution to the UK economy. A number of UK and foreign airlines have taken loans under the scheme, including easyJet with GBP600 million (EUR663 million), Ryanair GBP600 million, British Airways GBP300 million (EUR332 million) and Wizz Air GBP300 million. Virgin Atlantic does not qualify due to its credit status.

Aegean Airlines is to apply for loans under Greece's COVID-19 Business Guarantee Fund. As with the UK scheme, this is not focused on aviation.

Loans up to 25% of a company's turnover, provided by four Greek banks, can be guaranteed by the government for 80% of their value. Aegean is seeking EUR150 million or 11% of its revenue.

Some argue that state aid's net should be cast more widely than the focus on the obvious national airlines of Europe.

Ryanair's Mr O'Leary does not want state aid for his group, but he is more opposed to what he sees as its distorting impact on competition. "We don't want state aid, but we're now being asked to compete with not one hand, but two hands tied behind our back."

He has previously suggested that, if governments are going to support airlines, it should be non-discriminatory and based on airlines' share of traffic in a particular country.

He may have a point.

The EU is supposed to be a borderless single market indifferent to the individual nationalities within it, even if the coronavirus has temporarily rebuilt borders.

All airlines serving a country provide it with connectivity and wider benefits to the economy of that country, so perhaps any aid should be shared among them. Arguably that would be in the wider European interest.

The UK's Covid Corporate Financing Facility is certainly non-discriminatory in nationality terms (and in terms of industry sector), but is the exception to the general rule that governments are only concerned with support to airlines of their own country.

Others argue that the state aid net should not be cast at all.

Harsh, perhaps, but some would question the use of public funds to prop up airlines in a time of vastly reduced demand when there are more pressing causes.

Far better to let the market pick the winners and allow a new aviation industry to re-emerge in the recovery, they would say. Particularly so, if the recovery takes longer than expected and further rounds of state are then called for.

Notably, the two airlines leading the return of capacity in Europe, who also have the strongest liquidity, have not sought state aid beyond the small sums provided under the UK scheme. They are Ryanair and Wizz Air.