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Most (if not all) airliners suffered great losses during the Covid-19 pandemic due to air travel restrictions. A single aeroplane like a Boeing 737 costs about $22.5 million on average. Flying 450 hours a year, the hourly costs are roughly $7,000. If several or all planes are grounded due to whatever reason, the maintenance and operating costs will surpass many millions of dollars. If this is not resolved quickly, bankruptcy is the only outcome. Air France - KLM has a total debt of about 8 billion dollars.
They were forced to take a corona loan from the France government in order to stay operational and able to pay all the bills. If we take a look at the current most important ratios, things are not looking great:
Although it is expected that air travel will grow in the upcoming years because Covid-19 seems to be under control. But predicting what will happen in the future is always a big guess. With extreme gasoline prices due to the war with Russia and Ukraine also causing an increase in air travel prices.
The governments of the Netherlands and France have a serious stake in Air France - KLM. The Netherlands own 9.3% of the shares and France owns almost 29% of all shares. In order to pay off a large amount of these corona debts, Air France - KLM quadrupled its shares on may 26th 2022.
First, let’s have a look at the current chart of Air France - KLM:
An average investor who has no clue what is going on notices that the stock dropped from €4.25 to about €1.68. That seems like a bargain! Suddenly the price dropped by 60% in a day. As with any stock, you should be very cautious when the price suddenly drops. Why did the price drop?
Air France - KLM decided to quadruple their shares on emission basis. That means that current shareholders will lose a part of their ownership in the company unless they buy more shares for a reduced price. Unlike a stock split where the amount of shares is split and the current owner receives the amount of shares based on the split. For example, when you own 100 shares of a company and they apply a stock split of 1:2 to decrease the price of the shares you now own 200 shares.
But because Air France - KLM did not issue a stock split but issued new shares based on emission, current shareholders saw their position reduced by about 60%. In order to keep the same stake in the company, the current shareholders need to buy more shares. Air France - KLM gave every shareholder a claim for each share they currently own:
In this case, the claim gives you the right to buy three shares for €1.17 at the closing date on the 9th of june. Or, you can sell your claim to someone else. The current price for buying or selling a claim is about €1:
Source: Boerse Frankfurt.de
You can find the ticker of claims by searching for: AIR FRANCE-KLM INH. ANR
A quick math tells you that if you buy 1000 claims for €1.10 gives you the right to buy 3000 shares for €1.17. As the current share price is €1.68 (on the 5th of june 2022), that would mean you would see a profit of about €430. Assuming the stock price will be €1.68 at the 9th of june.
This is just a simple calculation which most people can make. So either way, the current claim price is too low or the current stock price is too high. It would make sense that if the amount of shares quadruples, the price per share should be divided by four. Before the extra shares were released, the price was about €4.30 per share. €4.3 / 4 = €1.075. But the current price per share is €1.68.
It would be a no-brainer at this moment (5th of june 2022) to buy as many claims as possible for €1.10 per claim and buy back shares for €1.17 a piece if the price of the stocks remains €1.68 at the 9th of june. But what will happen to the price in the days leading up to the 9th of june?
If you bought shares for €4.30 you lost money. Even if you sold your claim rights for €1.60 at 30th of may. If you bought 1000 shares for €4.30 (just before the new shares were issued) it would cost you €4300. The real price would be different because that depends on the orderbook and transaction costs. After the newly issued shares the priced dropped to €1.68 * 1000 shares = €1680. Meaning you lost €4300 - €1680 = €2620 in a single day. But in this case you received 1000 claims which were sold for €1.63 at the top:
Source: Boerse Frankfurt.de
If you sold 1000 claims you would get about €1630. This would reduce your losses to about €1000 (€2620 - €1630). So no matter what you do, you’ll lose money. The lowest price of the Air France - KLM shares was about €3 at march 5 2022:
If you bought 1000 shares you paid €3000. You also get 1000 claims which are worth about €1 which equals €1,000. Your total cost would be €4,000. With the current price of €1.68 you would get €1,680 + €1,000 in claim rights so you will still end up with a loss. €2,680 vs the €3,000 you paid to buy the shares = €-320. Keep in mind that other websites already ajusted the price in relation to the outstanding shares:
This makes it look like the price never was above €2.4 in 2022 but that is definitely not the case.
Now you have to make the decision to take your losses or buy back more shares to regain the same amount of ownership. As the claims to buy back shares are due on the 9th of june, you have to make some calculations and due diligence to figure out if the price of the stock will be higher or lower than €1.17 on the 9th of june.
If the price drops below €1.17, claims become worthless. Because a claim to buy a share for €1.17 while the share is trading for €1 will cost you money. So should you sell your claims now or buy back more shares? Keep in mind that if you buy back more shares you are investing even more money. You still have to pay €1.17 per share. Meaning, you can’t even buy shares if you don’t have money.
In theory, if the amount of shares quadruples, the price per share will decrease by four times. Because the fundamentals of the company did not change. However, because they raised 2 billion dollars and use this money to pay off debts, the company has a better financial standpoint vs before the newly issued shares. That might have a positive impact on share price.
Either way, there will be some fluctuation in either price per claim or price per share in the upcoming days. Not to forget the covid-19 pandemic is still heavily influencing air traffic. We might see new covid variants next winter. What you should do depends on the amount you paid for shares, what will happen in the future and what kind of investor you are (long or short term). The Netherlands and France still have a large stake in Air France - KLM and they did invest multiple times over a few decades to save the company. It's not likely the company will go bankrupt but always look at the fundamentals, future predictions about covid-19 and air travel restrictions.
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