First, it was Air France, next came Lufthansa, and now KLM. The Dutch carrier said on Friday that it had secured €3.4 billion in financing from the government. It said the new financing is to deal with the “unprecedented impact” the pandemic has had on its operations.

Dutch Finance Minister Wopke Hoekstra said the package will ensure that KLM continues to operate until at least 2021. He added that it was needed “to make sure that KLM and Air France can continue to fulfil the important role that they have in our economy.”

KLM CEO Pieter Elbers also stated:

Due to COVID-19 KLM is currently in an unprecedented crisis. The financing package is necessary to secure the long and difficult road of recovery in the coming period… With the financing package, KLM can continue to fulfil its important social role in economic recovery and sustainability.

Highlights of KLM’s Bailout Package

There are two main clauses of the rescue package:

1. A revolving credit facility of €2.4 billion, funded by 11 banks. The bank loans will have a 90% guarantee by the Dutch government and a maturity of 5 years.
2. A direct loan of €1 billion granted by the Dutch government. It will have a maturity of 5.5 years.

However, there are some conditions that will irritate KLM after its first withdrawal. Initially, KLM will draw €665 million in new credit facility and a pro-rata amount of  €277 million from the direct state loan. Subsequent withdrawals, however, will be possible if KLM satisfies “certain conditions” laid out by the state.

Some other strings attached to the state-bailout includes “pay and spending cuts, a freeze on bonuses and dividends, as well as ambitious environmental targets” — Reuters.

Elbers says that KLM wants to save as many jobs as possible, but it will be very difficult as the company will be mandated — as part of the new plan —to cut company costs by 15%.

KLM has a voluntary redundancy plan in place for its employees.

Critique on the State-funded Bailouts

Whenever there is news of a state-backed bailout for a European carrier Ryanair’s vocal Chief, Michael O’Leary, can be found on the scene. O’Leary was quick to dismiss the new funding secured by KLM deeming it as “illegal state aid.” He claims that every Dutch citizen is now obligated to pay a €200 subsidy.

This amount, he exclaimed, could be used to buy 5 Ryanair flights! 

O’Leary’s stance goes directly against IATA’s directive for governments to fund their national carriers at this crucial time. He argues— with regards to Lufthansa’s recent government bailout: “This bailout money will be used to bully smaller rivals out of the market, in line with Lufthansa’s grim record of anti-competitive behaviour.”

If we remove the apparent bias form O’Leary’s statement, he does make a valid point. By subsidising national airlines, governments can dominate competition (in particular LCCs like Ryanair) by offering dirt-cheap rates to customers. This is especially relevant these days as almost all European carriers are rebooting their networks and intend on capturing a significant market share by offering the best deals to travellers.

KLM’s €3.4 billion bailout package still awaits approval from the Netherlands parliament and the European Commission.

KLM, announced last week, plans to rebuild its network in the coming months.

Do you agree with the Dutch government’s decision to rescue KLM with a €3.4 billion package?

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