Airlines have had a tough time in the past two years with the pandemic shutting down global travel, higher fuel costs and rising inflation, and Air France-KLM [EPA:AF] has been no exception. While the Franco-Dutch company is well on its way to a recovery, capacity concerns and an upcoming strike during the busy holiday period look likely to derail some of the gains it made in recent months.
Two Air France cabin crew unions posted a strike notice for 22nd December and 2nd January due to the management’s failure to extend their collective agreement, which expired at the end of October. If the strike goes ahead, it will hit the airline at a critical time during the holiday season.
The stock also came under pressure after the company announced the sale of EUR300m worth of bonds convertible into new shares to pay back state aid and increase capital, sparking dilution fears for existing investors.
Following the news on 16th November, Air France-KLM’s share price fell more than 10% to EUR1.26. Over the past six months its shares are down 37%.
State Aid repayment
The group has been under pressure to repay the state aid it received during the pandemic as it has kept it from participating in the potential consolidation of the airlines industry.
It received more than EUR10bn in state aid during the pandemic, but it has come with certain conditions, including a prohibition on taking a stake greater than 10% in another airline. There are expectations of continued consolidation in the sector, with rivals already making moves. IAG LON:IAG, owner of British Airways, for example has taken a 20% equity stake in Air Europa. There are rumours that it could also takeover easyJet LON:EZJ.
Air France, on the other hand, has been tipped for a potential takeover of TAP Air Portugal. However, for this to take place, the group will first need to repay its state aid.
Rights issue
In May, the company launched a EUR2.3bn rights issue to raise money to repay the state aid. After its third quarter results, the group also said that it was repaying EUR1bn early to the French state.
Third quarter results showed that group revenue reached EUR8.1bn, EUR503m higher than it was in 2019, despite capacity only being 89% of 2019 levels. Operating income was over EUR1bn with operating margin at 12.6%. The positive results were despite rising fuel costs and inflation.
The group said that it will contemplate possible hybrid bonds issuances during the rest of 2022 and in 2023 up to EUR1.2bn subject to market conditions.
Despite the strong third quarter figures, Air France-KLM also cut its capacity forecast, warning of losses due to prolonged curbs on flights at Amsterdam’s Schiphol airport.
With signs of recovery plagued by ongoing capacity issues and the threat of strikes, Air France-KLM has been the target of a large increase in short interest last month. In addition, analysts at BNP Paribas cut their rating from neutral to underperform, while UBS reiterated its neutral rating on the stock.
There are clearly mixed views among analysts as others, like Kepler Capital Markets have a buy rating on the stock. The shares have a consensus rating of ‘Hold’.