State aid to KLM flows to oil traders and Irish tax haven

To survive the corona crisis, Air France-KLM will receive a billion-dollar injection. Why actually? Ties Joosten followed the money trail and ended up in Ireland, where a handful of companies earn billions from planes that are not currently flying.

(summary of a Dutch article in Follow The Money, April 30, 2020)

No kerosene, but pay

Air France-KLM will currently spend less money on kerosene, which is normally a huge expense with 5.5 billion euros. However, the question is how much the airline saves here.

This is how it works: to hedge against variable prices, airlines record part of their fuel consumption in the future. You call this hedging. The airlines agree with oil traders and insurers to buy a certain amount of kerosene for a certain price in the future.

According to Bloomberg calculations, Air France-KLM has a staggering two-thirds of its future fuel consumption, at a value of $ 78.50 a barrel of oil. On the world market, however, the price of a barrel of oil has fallen to a record low. As a result, the futures of AirFrance-KLM have a negative value: the airline has to pay in order not to use kerosene.

It is not clear from the outside how much this will cost. But an indication can be given. In its 2019 financial statements, Air France-KLM writes that any $ 10 drop in oil prices will result in a loss of $ 584 million. Since the end of 2019, the oil price has fallen not by 10, but by 45 dollars. AirFrance-KLM would therefore have a disadvantage of more than 2.5 billion euros. The counterparties of those contracts benefit from this.

Parked planes cost billions

The aircraft themselves are also currently a financial pain in the neck of Air France-KLM. For those who recently drove past Schiphol, that will not sound strange. In long lines, the blue Boeings and Airbusses are standing there destroying capital, parked waiting for better times.

An important reason for this destruction of capital is that Air France-KLM does not own all of these aircraft: a large part of the fleet is leased. 14 of the 15 largest aviation lease companies are located in Ireland. Together they officially own more than half of all leased aircraft in the world. This is the result of a number of tax breaks Ireland has created for its leasing companies.

Wouter Looman
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