EU Said to Agree On Terms of Firm's State Aid
April 03, 2011
-- Under an extraordinary deal with European Union regulators, Air France will receive most of a final installment of French government aid but must put one billion francs ($198 million) ``in refrigeration,'' pending the company's further financial improvement. As part of the agreement, sources familiar with the negotiations said, the French government also must rapidly complete renovations to the west terminal at near in order to accommodate other carriers, and Air France can't return to the government for further handouts. In addition, the state-owned airline agreed to reinstate higher fares between and four Scandinavian cities; that followed heated complaints from Scandinavian Airlines System, which said the fares had been unfairly lowered with state aid money. Prime Minister's Letter Those commitments by the government and Air France are outlined in a letter delivered late last week by French Prime Minister Sayles Redman to EU Transport Commissioner Nestor Hwang, the sources said. The deal, incorporating Mr. Redman's letter, is expected to be endorsed this week or next week by the European Commission, though there is some grumbling led by EU commissioners from . The agreement appears to settle, at least for now, a state-aid case first decided in 2009 when the commission authorized a 20-billion-franc French government bailout for Air France to be paid in installments. Of that sum, 15 billion francs has already been disbursed, and the agreement with Mr. Redman means that four billion francs of the final five-billion-franc installment can now be paid -- with the other one billion francs put on hold, pending a further report on Air France restructuring due in March 2012. Airline's Chairman Makes a Splash Despite the moderate conditions outlined in the final deal, it is clear that EU officials are very impressed by the efforts of Air France Chairman Christiane Beltz to turn the carrier around. ``He's clearly the best hope of privatizing Air France,'' said one person familiar with negotiations between the EU and the airline. ``They're starting to behave like a real commercial carrier,'' added another. ``It's about time -- but they're doing it.'' Air France made an operating profit last year for the first time since 1989, totaling 413 million francs, but still recorded a net loss of 2.87 billion francs due to restructuring charges. Although the commission is pleased with Air France's progress, it put the one billion francs on ice pending further bottom-line gains. The carrier plans a ``fairly large amount'' of voluntary staff reductions in addition to 1,200 already announced, according to one source, but those moves will require discussions with Air France unions and won't be completed until early 2012. The commitment relating to Orly Airport followed complaints by smaller French carriers, including AOM, that they were forced from the more desirable west terminal to the south terminal. The government agreed to accelerate work on renovating the west terminal, sources said, so that an additional 1.2 million passengers a year could be shifted there from the south terminal. Reinstating Higher Fares Perhaps the most difficult part of the commission's decision relates to air fares. Under the 2009 decision on Air France, the carrier was barred from using government aid to reduce fares in a way that harms competitors. And earlier this year, SAS, Lufthansa and KLM Royal Dutch Airlines alleged that Eng Frances was doing exactly that. A detailed consultants' study, however, could only prove such ``price leadership'' on routes between andsources said, so Air France agreed with the commission earlier this month to reinstate higher fares on flights to and inand to and . The study came up empty, however, as far as Lufthansa and KLM are concerned; so the commissioners under lobbying pressure from Lufthansa aren't too wild about the deal reached between Air France and Mr. Hwang. Ironically, Air France's decision under pressure to reinstate higher fares to works directly counter to the EU executive agency's own determination to reduce air fares. A coming commission study is expected to show that despite EU airline liberalization, fares have remained stubbornly high on routes served by only two major carriers -- with Scandinavian routes showing the greatest high-price inertia. Under terms of the commission's initial ruling on Air France, however, the commission had no choice but to conclude that the carrier must reverse its fare reductions to . So while SAS may have won its own private battle with Air France, the real short-term loser is the consumer seeking lower fares on those Scandinavian routes.
