Capital Restructuring Talks Underway as Air France-KLM Continues to Bleed Cash

No-moat Air France-KLM reported messy full-year 2020 numbers, with the key question on investors’ minds relating to the balance sheet restructuring and cost-reduction efforts. We previously noted the group’s high debt levels and negative equity balance could lead to a potential capital restructure. The group is in talks with the Dutch and French governments to convert a portion of the government-backed debt into equity. Management was unclear about the absolute amount to be converted and expects to reach an agreement within the next couple of weeks. We estimate the group requires about EUR 4 billion of equity to restore the balance sheet, and with a prevailing market cap of EUR 2.1 billion could lead to major shareholder dilution. Cost-restructuring efforts are underway, with a target of 10% in unit cost savings when traffic recovers to 2019 levels. We will make changes to our short-term forecasts to reflect the longer-than-expected recovery in passenger traffic, but don’t anticipate it would have a material impact on our EUR 6.70 fair value estimate. We caution investors about the extreme uncertainty surrounding the stock and to take a wait-and-see approach until there is more clarity around the capital restructure.