Air France-KLM acquires 31% stake in Virgin Atlantic

Air France-KLM has announced a major step in strengthening its strategic partnerships with the creation of a single global joint venture between Air France-KLM, Delta Air Lines (Delta) and Virgin Atlantic. It has also intensified its partnership with China Eastern Airlines.

Air France-KLM will acquire Virgin Group’s 31 per cent stake in Virgin Atlantic for approximately £220 million, with Delta and China Eastern each to take a 10 per cent stake in Air-France-KLM in the context of reserved capital increases for a total amount of €751 million.

“This unprecedented partnership positions Air France-KLM at the forefront of global air transport,” said Jean-Marc Janaillac, president and CEO of Air France-KLM. “With Delta and Virgin Atlantic, we are strengthening our transatlantic alliance and becoming the first alliance between Europe and the U.S. in traffic terms.

“With China Eastern, we are consolidating our position in a fast-growing market. The commitment and efforts of Air France-KLM employees have improved our performance and our strategic partnerships. These agreements accelerate the value creation initiatives implemented through the Trust Together plan.”

European pillar of the world’s first network of airlines

Air France-KLM, Delta and Virgin Atlantic signed a Memorandum of Understanding setting out the basis for a future joint venture between Air France-KLM, Delta and Alitalia on the one hand, and Delta and Virgin Atlantic on the other, within a single joint venture.

This will mark the expansion and strengthening of one of the most successful models of partnership in the airline industry. Subject to the signing of the final agreements and the approval of the relevant regulatory authorities, the joint venture intends to:

• Provide an incomparable offer to customers on the transatlantic axis
• Stimulate capacity growth of partners
• Create a privileged partner status to include other players later
• Establish a 15-year partnership
• Generate significant synergies within the joint venture through new code shares to and from London, sales coordination, partnership extension and cost reductions

The creation of the joint venture is intended to consolidate Air France-KLM’s position in the North American and European markets with twelve hubs on both sides of the Atlantic: Amsterdam, Atlanta, Boston, Cincinnati, Detroit, Los Angeles, London Heathrow, Minneapolis-St Paul, New York-JFK, Paris-CDG, Salt Lake City and Seattle.

Strengthening cooperation with China Eastern

At the same time, Air France-KLM and China Eastern will intensify their trade cooperation and strengthen their partnership within the framework of the existing joint venture, with the aim of:

• Securing and strengthening Air France-KLM’s presence in the Chinese market through a long-term partnership
• Ensuring Air France-KLM has a leading European position in Shanghai, the main business market in China
• Improving service to customers
• Enabling increased cooperation in networking and operational synergies

The strengthening of this cooperation will be in line with the partnership strategy of Delta, already a shareholder of China Eastern Airlines Corporation Limited at 3.2 per cent. This cooperation does not call into question the current joint ventures between the Air France-KLM group and China Southern.

An expanded network

All of these agreements with Delta, Virgin Atlantic and China Eastern will enable Air France-KLM to offer its customers an expanded network and capitalize on the pooling of large distribution networks. As part of the ‘Trust Together’ strategic plan, these partnerships will support the Group’s profitable growth.

Considerable investments

In order to consolidate the new transatlantic joint venture, Air France-KLM has expressed its intention to acquire a 31 per cent stake in Virgin Atlantic for approximately £220 million. This operation is expected to take place in 2018, after approval by the relevant regulatory authorities. Air France-KLM will become Virgin Atlantic’s second largest shareholder after Delta, which holds 49 per cent of the shares and will serve on the Board of Directors at the same level as Delta.

In addition, Delta and China Eastern – now Air France-KLM’s long-term partners – will subscribe to two reserved capital increases for a total amount of €751 million and a subscription price of €10 per share, enabling them to acquire 10 per cent of the share capital of Air France-KLM.

This price represents a premium of 42 per cent compared to the weighted average of the price over the last 12 months and a premium of 13 per cent compared to the weighted average price since the presentation of the annual results on Feb. 16, 2017. Compared with the closing price of July 26, 2017, the subscription price has a 17 per cent discount.

The completion of these reserved capital increases will be subject to the vote of the shareholders of Air France-KLM at an Extraordinary Shareholders’ Meeting convened on Sept. 4, 2017 and to the approval of the relevant regulatory authorities. These reserved capital increases will be the subject of a prospectus which will be subject to the approval of the Autorité des Marchés Financiers (AMF).

The investments will be accompanied by the appointment of two directors to the board of directors of Air France-KLM designated by China Eastern on the one hand and by Delta on the other.

The subscription agreements signed separately with Delta and China Eastern, which do not act in concert, have a duration of 25 years, accompanied by a commitment by the partners to retain their shares subject to certain exceptions, and not to purchase shares which would lead to a 10 per cent capital overrun for five years.

The partners also undertook not to divest their participation in another airline without the agreement of the board of directors of Air France-KLM. The capital increases are intended to improve the financial structure of Air France-KLM, accelerate the reduction of its net indebtedness and finance the acquisition of a stake in Virgin Atlantic.