Realist, not conformist analysis of the latest financial, business and political news

Air France – A Useful Example Of Why State Investment Doesn’t Work

We have a useful and interesting example of why state investment doesn’t work here in the case of Air France. One that carries a little more weight than just that simple observation that it’s being done by Frogs and therefore is doomed to garlic ridden failure.

The problem is that the state always does end up investing in the extant failures, not in the new and more efficient insurgents.

The French government has increased its stake in Air France-KLM to more than three times that of the Netherlands, strengthening its grip on the struggling airline.

A share issue by the struggling airline more than doubled the French government’s holding to 28.6pc, according to a statement on Monday, followed by China Eastern Airlines which increased its stake from 8.8pc to 9.6pc to become the second biggest shareholder.

The Netherlands, meanwhile, emerged from the sale with a diluted 9.3pc after the airline raised a total €1.04bn (£890m) from investors from a stock issue of €4.84 per share. The changing stakes upsets a politically sensitive equilibrium that has been in place for around two years, with France and the Netherlands having each held around 14pc of the Franco-Dutch airline. America’s Delta Air Lines also diluted its holding to 5.8pc.

An old, union riddled, airline flying on the old pattern of capital to capital with a high cost base gets the state investment.

This is why all that state investment of the past century has left every nation with a national debt climbing past 100% of annual economic output of course. Because the investments made by said state never are in the young and growing companies that produce an equity return on the investment.

Ryanair, Wizz, Easyjet, the airlines that have made bundles for investors are exactly the companies that states haven’t invested in.

As to why this is it should be obvious – and not just because we are discussing the habits of our Gallic neighbours and therefore enemies. Whether that’s because they are Gallic or neighbours is up to the reader. It is only extant businesses that have a political constituency to generate state action. Those things that don’t exist as yet don’t have any votes therefore they don’t gain any action from government. The airline trying it on by flying to the next airport over with a half share in an old DC-10 is more likely to be closed down by political action – fair enough with a DC-10 perhaps – for competing with an extant organisation with 30,000 votes in the form of employees upset with the idea of competition.

Government, by political necessity, is going to direct the investment cash to the dinosaurs who will be, or are being, put out of business by the newer and better ways of doing things. Which is why the very idea of government directing investment in the economy is the way to glories such as the Trabant, British Steel, the continued existence of Air France and, yes, debt to GDP ratios soaring over 100%.

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Boganboy
Boganboy
3 months ago

French investment in nukes seems to have worked. Of course that was a political decision in response to the political decisions of the Muslims to cut off oil supplies.

I’d argue that it’s usually cheaper to find another source than to fight a war.

Climan
Climan
3 months ago
Reply to  Boganboy

You beat me to it, nukes are a good example of where the risk to private capital is so high that state money should be much cheaper.

I believe that the state will eventually have to own ALL “proper” power stations, private capital will no longer touch them.

MrVeryAngry
MrVeryAngry
3 months ago
Reply to  Climan

Surely it the very government regulationsm that makes nukes so expensive?

Bongo
Bongo
3 months ago

Stockport Council bought the Merseyway shopping centre from the receivers. So they might have gotten a good price. But it does show that if the government feels the need to buy stuff that was formerly private they should wait until the private company goes bust.
You don’t do what Sefton Council did which was to buy a shopping centre ( The Strand in Bootle ) at a price which yielded a small profit to the vendors.

steve fleischer
steve fleischer
3 months ago

“Never reinforce defeat.” Von Clausewitz

Esteban
Esteban
3 months ago

I’m reminded of the hilarious complaints of the Doom Pixie that politicians who have to get reelected in 2 years weren’t thinking long-term.

Michael van der Riet
Michael van der Riet
3 months ago

This is but a peccadillo by comparison with South African Airways, losing billions even in real money, and only about one per cent of us Saffers will ever fly it in their lifetimes. It would be cheaper to weld the doors shut and send everyone home on full pay.

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