A last hurray – why doesn’t the market save KLM?

Why are business acumen and common sense buried under blue KLM sentiment? There are far more important social issues on our plate (climate, inequality, education, healthcare, crumbling social cohesion). Let the government focus on these; KLM’s shareholders will have to fend for themselves. Let the market do its work and, if necessary, opt for a new share issue.

Should KLM be saved and if so, why by the government and not the market?

Why are business acumen and common sense buried under blue sentiment at KLM? “Let the market save KLM and spend the billions in state aid on the big social tasks,” said Emeritus Professor Kees Cools.

Prof. dr. Kees Cools is emiritus professor corporate finance & governance at the Tilburg University – TIAS Business School and also Fellow at the Governance Department of Tilburg University.
After the €3.4 billion in (state guarantees on) loans for KLM, Finance Minister Hoekstra now wants to talk about strengthening KLM’s equity.

Does KLM need to be saved? If possible, but not by the government. Even ING, a systemic bank, should not have been bailed out by the government in 2008. ING was supported by the government in 2008 with 10 billion euros because, as a vital systemic bank, it was not allowed to fall. ‘Vital’ means that the demise of a company would result in great economic damage. ‘National pride or the threat of unemployment for ING employees had no primary significance in the considerations at the time,’ said the top civil servant Bernard ter Haar, who was directly involved at the time, recently in his blog. On the basis of that criterion, KLM should not be supported. KLM is not vital to the Dutch economy. If KLM needs to be saved, so do do dozens, if not hundreds, of other companies.

Is KLM a vital company?

Moreover, bankruptcy is independent of the viability of a company. KLM could continue its operations after a possible bankruptcy, or its aircraft, landing rights and other assets could be bought by other airlines. That’s how it went with DAF and Fokker at the time. And also with Sabena, the “KLM of Belgium,” which went bankrupt in 2001. Even with this largest bankruptcy in Belgian history, the economy did not suffer any major damage. This would also apply to the Dutch economy in the event of a KLM bankruptcy.

New issue creates right balance between existing and new shareholders

Then again. Even if there is a vital company, there is still no role for the government in the first place. In 2008, it was most likely not necessary for the state to support ING. ING could have done a share issue itself. That’s what a stock exchange fund is for and that’s what (capital) markets are for. For the sake of urgency, the government could have advanced the 10 billion until the money from the issue arrived.

It had been a golden opportunity for investors, buying at a low point, with the continuity guarantee of the Dutch State in the back pocket. And the same applies now. New shareholders can buy back shares at an attractive price in a new issue, and the existing shareholders, through their dilution, are helping to rescue KLM; and that’s fair with all the dividends and share price gains they’ve pocketed in recent years.

Share issue

It really can be done differently, even in times of corona. A good example is the world’s largest cruise line company Carnival, owner of the Holland America Line among others, which has already issued shares three times during the corona crisis. For investors who stepped in during the first issue on April 2, the share price has doubled since then. Another example is KPN. In early 2013, the share price had collapsed to 1.50 euros, its lowest price ever, due to heavy losses. KPN, surely not unimportant to the Dutch economy, then ‘simply’ had to issue shares for EUR 4 billion. ING could have done the same and KLM – as a viable company in the long term, probably in a slimmed-down form – can now do the same.

Why not spend the many billions elsewhere and especially better?

What is wrong with politics? Why not let the market do its job and spend those billions meaningfully elsewhere? And why, at KLM, are business acumen and common (economic) sense buried under blue KLM emotions, Chamber-wide? Ogem, Fokker, DAF, V&D, Imtech (22 thousand employees at bankruptcy in 2014), DSB bank, KPN, Hema, none of them could count on government support.

Why do the tens of thousands of employees of these companies count for less than the employees of KLM? Why does Minister Hoekstra say about rescuing KLM that “We are doing all this to save the company and to retain as many jobs as possible” and not for other companies? Perhaps more jobs can be saved elsewhere with less money.

Blue ministry

The Ministry of Infrastructure and Water Management is called ‘the blue ministry’ in The Hague circles. State support keeps ‘our blue pride’ in the air,’ Minister Van Nieuwenhuizen stated ‘unbusinesslike’, the Volkskrant wrote on April 27. In addition, not only KLM, but the entire aviation sector – as major polluters, moreover – are favored and unfairly subsidized, with zero VAT on tickets, zero excise on fuel, during corona, only in planes, people were allowed to sit face to face, the sector does not participate in the Paris Climate Agreement and does not pay any CO2 tax.

Billions in aid is expensive form of government failure, or is it a drift?

We saw two issues. First, there is no market failure and yet the government intervenes, for billions, an expensive form of government failure. And second, KLM is wrongly treated as a systemic bank, as being vital to our economy. The first comes across as naivety or ignorance, a rescue reflex? The second as a big Hague taboo, Parlement wide.

The Hague has made wrong trade-offs from a kind of tunnel vision. More from primary emotions and blue gut feelings than economic rationality and common sense. It is important to conduct this debate in all its sharpness and to get The Hague back on the path of (economic) reasoning.

There are major social challenges (education, climate, corona, the growing social gap, etc.) where the role of government is indispensable and billions are involved. Shareholders are perfectly capable of turning the tide, let the market do its work.

This opinion appeared earlier in Mejudice in an extended form under the title ‘Government Failure and KLM Madness’. 

Use this link to the original article in Mejudice, of prof. dr. Kees Cools.