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Air France Privatization

Introduction

On February 10, 1999 Patty Grace contemplated the stock price in front of her. The first shares

of the long awaited IPO of Air France, Frances national airline, were set to begin sellingtomorrow (although actual trading would not begin until the 22nd). The bankers in Paris had

finally set the price of the issue at 14.2 Euros per share ($15.97), which was at the upper end ofmost analysts expected range. At this price they expected to sell 38 million shares (approximately

17% of Air France). Although the issue was suspected to be oversubscribed by as much as twelvetimes, Patty was unsure what course of action she should recommend to her clients.

International diversification had become something of an obsession among many of Pattys clients

as they observed the growth and opportunities abroad. Exhibit 1 is an overview of many of the

markets in which she and her clients participated. As the head of a major I-Banks Europeanresearch unit, Patty was responsible for issuing recommendations on new equity issues in Europe.

Among the many considerations she faced in issuing her recommendations were whether toadvise her clients to invest directly in European equities, to invest in the parallel ADRs in the USmarket, to invest in GDRs in Switzerland or Luxemburg, or to wait for their issuance on stillother markets.

In the case of Air France, the French government wanted to avoid offering the initial sharesoutside of Paris. It was expected that more shares would soon be floated in most of the major

exchanges worldwide and quite possibly in several emerging markets as well. Eventually theFrench government hoped to sell up to 49% of Air France.

The IPOs that had resulted from the privatization of European state-held entities had for the mostpart been wildly successful. Pattys research had led her to believe that fundamentally, Air France

would be a good investment for most of her clients. However, she was worried that there may besome differences between the Air France issue and the previous privatizations she had participatedin.

Despite her resolve to invest in Air France, a few issues still troubled Patty. Among her biggestconcerns was the state of equity markets world wide, especially in light of the enormous

upheavals of the last year and a half. In addition, although the Socialist-Communist party that hadcome to power in France had allowed the privatization to proceed, observers were wary of thegovernments bias against non-state entities and capitalism in general. Most observers doubted

that Air France would ever be re-nationalized; however there were lingering concerns that theFrench sense of nationalism may prohibit the further sale of equity stakes in Air France, or couldpotentially prevent the airlines planned fleet upgrade by denying it access to the international

capital markets. Of further concern was the organized labor climate in France.

Hal B. Heaton prepared thiscase as the basis for classdiscussion.

Copyright 2004 Hal B. Heaton. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording,or otherwisewithout the express, written permission of Hal B. Heaton.


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International equity markets

The US

At the end of 1998 the US equity markets were by far the most liquid capital markets in theworld. This liquidity was largely due to continuing deregulation and the increasing number ofindividuals who traded frequently, many using inexpensive on-line accounts. An increasedwariness of the ability of Social Security to remain solvent had led to Americans investing in both

pension plans and mutual funds in record amounts. As investors around the world struggled toabsorb both the impact of the Asian financial crisis in the fall of 1997 and the Russian default onIMF loans in fall of 1998, they turned to the US as the safest place to invest. This combination

had led to virtually no commissions in the US and a very hospitable environment for a widevariety of new equity issues both domestic and foreign.

The equity markets in the US focused on three main exchanges, The New York Stock Exchange

(NYSE), the American Stock Exchange (AMEX) and the National Association of SecuritiesDealers Automatic Quotation System (Nasdaq). The largest and oldest exchange was the NYSE,

which used an open outcry system to execute trades. Each listed company on the NYSE wasassigned a specialist who assumed the market making responsibilities for that companys stock.All trading activity in a particular stock took place at one location on the exchange floor called the

specialists post. When trades were initiated, the brokers approached the post and stated theterms of their desired trade. They and the other brokers at the post competed to give their clients

the best deal. The specialist had a computer monitor listing all the current offers to buy or sellshares at various prices and the numbers of shares the quotes were good for. The specialist wasto assure that the transactions [were] executed fairly and in an orderly manner.

In the US, foreign stocks were traded as American Depository Receipts (ADRs). ADRs werenegotiable securities that were evidence of ownership of shares in a foreign company. ADRs

were developed to make trading and investment in foreign companies simpler for Americaninvestors.

US Banks created ADRs by purchasing foreign shares in the country in which they were issuedand then placing the shares on deposit in the bank. Dollar-denominated ADRs were then issued inthe US. The issuing bank translated cash distributions into US dollars, provided English financial

reports, and kept ADR holders appraised of stockholder meetings, pending offers, orrecapitalization plans. Because ADRs were registered US securities, the issuing banks wererequired to comply with the US Securities and Exchange Commissions reporting and disclosure

requirements. This made it relatively simple for investors to purchase foreign equities and stillmaintain the liquidity that was provided by the US markets.

Global Depositary Receipts (GDRs) were conceptually the same as ADRs. They differed in thatthey were created by banks in Switzerland or Luxembourg and could be denominated in any


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currency. Although GDRs were gaining wide spread acceptance they had yet to gain the ubiquityenjoyed by ADRs.

During the mid 1990's foreign companies had issued ADRs in record amounts. Among the mostsuccessful ADR offerings were those that represented the privatization of European state held

monopolies (such as telecoms, banks, and utilities).1

In 1997 alone over $19 billion had beenraised by 145 foreign companies issuing ADRs in the United States.

2

In the US it was said that stocks were sold, not bought. This was due to the underwriting process

used by investment banks when issuing equity. Before a new stock was to be issued, theunderwriting investment bank began sending representatives around the country to meet withprospective investors in an attempt to gauge demand and therefore to ascertain the price that the

stock could debut at. So-called road shows resulted in a price that was in theory commensuratewith demand. Despite this, the average Americans increasing obsession with stocks had led to anIPO fever that often resulted in a price pop during initial trading in the new stock. These price

pops had often exceeded 100% for some recently issued internet companies.

The Tokyo Stock Exchange

During the reconstruction period after WWII the Japanese financial system was recreated to

resemble the US system, complete with Glass-Steagall like restrictions and a Securities andExchange Law administered by the Ministry of Finance, which regulated securities companies and

the issuance of securities. While in theory the Japanese financial system was modeled after that ofthe US, the surviving keiretsu had created a system that lacked the independence and opennessfound in the US.

Keiretsu were essentially the remnants of the old zaibatsu houses. In the late 20th century the

keiretsu used their relationships to control businesses through overlapping investments. A typicalkeiretsu consisted of a major bank and several large companies, each of which owned sizeableportions of each other. The interlocking ownership resulted in inflated balance sheets that wereextremely difficult to untangle and often hid the deeply rooted financial problems of individual

keiretsu members. The keiretsu, and their counterparts in other Asian countries, were oftenblamed for contributing to the Asian financial crisis in 1997.

The equity markets in Japan centered on the Tokyo Stock Exchange (TSE), which had become aprominent player in the international arena during the 1980's when its market capitalizationsurpassed Londons to become second only to the New York Stock exchange. During the 1990's

however, a number of factors lead to diminishing interest in the Japanese financial markets by

both foreign and Japanese companies. These problems included: economic stagnation, the lowlevel of domestic investor interest, the high cost of doing business in Japan, the cumbersome tax

1Robert J Sherwood, The World of ADRs, Forbes, July 28, 1997, v. 160n2, p. 230 (3).2Depositary Receipt Trading Rose 23% in 97,American Banker, March 5, 1998, v. 163 n43,

p. 11(1).


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structure and a growing western frustration with the inefficiencies of the keiretsu businesspractices.3 These resulted in a collapse of volume on the Tokyo exchange, with volume falling53% between 1988 and 1998. Foreign listings on the exchange had likewise dwindled, halving

between 1991 and 1998.

To deal with this crisis the Japanese government proposed a program designed to demolishpreviously existing barriers between the separate industries of the financial services sector.According to Masashi Kawasaki, the TSE's managing director, the program was also designed tomake Tokyo more efficient and better able to compete internationally. Although there were

many similarities between the American and Japanese Financial systems there were importantdifferences in the way the respective stock exchanges operated. Perhaps the most notabledifference was that at the beginning of 1998 the TSE remained heavily regulated, operating on a

system of fixed commissions, despite the heavy deregulation that had occurred in almost everyother developed equity market. The deregulation, dubbed the Big Bang because of thedramatic changes it entailed, consisted of a series of reforms starting in April 1998 to create a

western-style market in which individuals take responsibility for investment decisions instead of

being protected by a web of laws and ministerial regulations.4 The effect of the deregulation andthe lasting consequences of the financial crisis of the late 1990s left many open questions about

the future of the Japanese markets.

Ownership of equities in Japan was dominated by commercial banks, however individuals

dominated trading. This was due to the fact that the powerful Nomura Securities placed equitiesin Japan similar to the way that Avon is sold in the US; by a retail force of sales women going

door to door. The clout of Nomura was not to be underestimated by foreign companies. WhenBritish Telecom went public in the mid 1980's Nomura said they were confident that they couldplace as many shares as they could get, whatever the price, and did.

Regular exchange members traded equities on the floor of the Tokyo Stock Exchange. Membersjoined the exchange as corporations and could send as many staff as they liked to the floor. This

differed from the New York and London exchanges where members joined as individuals.Evidence of the pressure on the Japanese government to deregulate included recent changes tothe system that allowed foreign securities companies to purchase seats on the exchange, and

pending measures that would allow an increase in the percentage of Japanese companies thatcould be owned by foreign interest. Saitori members (the equivalent of Specialists on the NYSE)functioned as intermediaries between the regular members of the exchange.

The London Stock Exchange

Prior to 1986, the London Stock Exchange (LSE) was markedly different from the other majorexchanges in the world. This was largely due to the fact that the London exchange operatedunder a single-capacity system, which prevented investment banks from simultaneously

3Gillian Tett, Japan `Big Bang Calls For Some Swift Reforms, Financial Times, March 24,1998.4Charles Smith, Opportunities To Ease The Pain, Financial Times, June 21, 1999, p. 3.


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underwriting, trading, and selling securities. Members of the LSE were separated into brokerswho bought securities and those who sold securities on behalf of their clients on the exchangefloor. The remaining exchange members were referred to as jobbers and functioned as

intermediaries between buying and selling brokers, making a profit on the bid/ask spread.

The early 1980s brought strong pressure to deregulate the London capital markets due to legaland competitive pressures. In 1986, the Big Bang deregulated commissions and created asubstantially more automated market with improved liquidity.

Two main flotation methods were used in the UK. Traditionally, so called rights offerings wereused which stipulated that listed companies in the UK were required to offer new issues ofcommon shares to existing shareholders in proportion to their original holdings of the stock. This

was designed to protect shareholders from involuntary dilution. The second alternative, known asa placing, was introduced as part of a mid 1980s deregulation. This method added flexibility toissue flotation and consisted of a fixed-price offering in which an underwriter would acquire

shares directly from an issuing firm, and then sell the shares to outside investors, primarily

institutions, without a commission. These placings were priced and contracted forsimultaneously, so the issued shares were the responsibility of the underwriter, who thus bore a

significant risk.5

US bankers often chaffed at the way securities were placed in the UK. In the UK, stocks were

bought, not sold. A few weeks before a new issue, British underwriters would announce theallocation of the shares and the price at which they would be issued. After the Impact Day,

when the price was announced, British bankers would literally wait for customers to call up andoffer to buy a certain amount of shares at the set price. For approximately two weeks theunderwriters would take orders until a specified Allotment Day when the allocation was

finalized and the stock was actually distributed.

American bankers and investors were often worried by the risk that underwriters took in the UK,

as the real demand and price for the stock could easily change over the course of a couple ofweeks. British bankers dealt with this risk by substantially underpricing new issues (often by asmuch as 15-20%). The underpricing of shares often resulted in a grey market in which shares

were traded at a true market value before they were actually listed.

A wave of privatizations in the UK had helped to change the makeup of the countrys equity

holders as the Thatcher government had attempted to make capitalists out of commoners.Because of rights offerings and other restrictions, individuals had come to make up a much largerproportion of equity owners in the UK. By generously allocating shares in the newly privatized

companies to employees and customers the Thatcher government had managed to create a very

5M.B. Slovin, M.B. Sushka, K.W.L. Lai, Alternative flotation methods, adverse selection, andownership structure: evidence from seasoned equity issuance in the U.K.,Journal of Financial

Economics, October 26, 1999, Vol. 57, No. 2.


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broad ownership base. More importantly, having many small shareholders made it very unlikelythat successive regimes would be able to easily re-nationalize the companies.

The British privatizations of the mid 1980's had proven to be overwhelming successes. After aninitial restructuring period, most of the newly private companies had created new jobs at the same

time they reaped record profits.6

By the mid 1990's, governments around Europe had begunimitating the British model of ending state ownership.

Emerging Markets

In the 1990's, countries around the world attempted to modernize their capital markets, leading to

dramatic changes in market capitalization. Exhibit 2 illustrates the growth of both developed andemerging capital markets. The result was that there were many emerging markets in which

investors could diversify their holdings. However, most were fraught with severe problems andcorruption. Among the most prevalent problems was the lack of independence between the

financial markets and the government.

In many foreign countries top university students actively sought employment with the

government upon graduation. After a few years as a bureaucrat, these elite would then move onto the upper echelons of management in state-run monopolies, the finance ministry, orgovernment. This path to professional success resulted in extremely close ties between industry

and the government. Although the potential for such relationships existed in the US, insidertrading and disclosure laws prevented many of the activities that occurred frequently and wereseen as natural in developing markets.

The risks inherent in underdeveloped and illiquid markets were brought into high relief first in1997 with the collapse of the Asian financial markets (dubbed The Asian Flu) and again in the

fall of 1998 when Russia defaulted on its sovereign debt. At the beginning of 1999 investors werestill extremely gun-shy about investing in economies that were unstable and where serious reformefforts had yet to be implemented. Many observers feared that the full effect of the Russian

default had yet to be felt and were particularly concerned about large developing markets likeBrazil, which had narrowly survived the Asian crisis. Despite their concern over the risks ofemerging markets, investors were still willing to invest in them because of their low correlation

with many of the more developed markets. See Exhibit 3 for information on correlation betweenvarious equity markets.

The French Market

During the 1980's the Paris Bourse transformed itself from a small local market to a major playeramong the international markets. The modernization was marked by nearly a tenfold increase inthe market capitalization of the Paris Bourse between the mid 1980's and the mid 1990's (see

6Guatam Niak, English Lesson, The Wall Street Journal, March 5, 1998, p. 1, column 1.


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Exhibit 4). The transformation was due to the relaxation of prohibitive barriers to foreign

ownership and participation, as well as a massive overhaul of the computer system on which theexchange ran. Between 1993 and 1998 the proportion of French shares held by foreign investorshad more than doubled to 35% as foreigners became increasingly interested in the diversification

and opportunities the French markets provided.7

By 1994 the Paris bourse had become the third largest market in Europe (behind Londonand the German markets). Many people thought that the French big bang (switching all stock

quotes to the euro on January 1, 1999) would help to propel the French markets ahead of theLondon Stock exchange, which clung to its old quote system. The emergence of France as aworld player in the world equity markets was largely fueled by the efforts of Prime Minister

Edouard Balladur. Beginning in 1993 Balladur had spearheaded a wave of successfulprivatizations in France including Banque Nationale de Paris, chemical giant Rhone-Poulenc S.A.,oil company Elf Aquitaine S.S., Union des Assurance de Paris (UAP), and Credit Local de

France.8

The number of French stockholders had also surged in 1997 and 19989. This was largely due to

the wildly successful privatizations that had succeeded as part of the Thatcherian-like goal ofmaking capitalists out of commoners. The recent sale of France Telecom had introduced even

more enthusiasm because of its success despite the newly elected ruling party in France.

While privatizations had become popular throughout Europe, Balladurs efforts and successes

were especially notable because of the extremely anti-capitalist political clime, labor policies, andunions that dominated business in France. The true success of Balladurs programs wasevidenced by the fact that the sale of France Telecom had been the most successful privatization

in France to date, raising $6.7 billion for the government. Moreover, France Telecom had beenprivatized under the socialist-communist government of Lionel Jospin (Balladurs successor), whohad been elected the previous year after a campaign that had been largely centered on his pledge

to stop the sale of French government assets (i.e. privatizations).

Despite the success of previous French privatizations, the backers of Air France still faced a

number of obstacles, including an unsupportive government and negative public sentiment.Among their most severe obstacles were obstinacy of Air Frances pilot union and newly enactedrestrictions on the length of the legal workweek in France.

In a somewhat surprising and blatantly anti-capitalist move, the French government had recentlypassed a law that reduced the legal workweek to 35 hours. The law was an attempt to lower

Frances 12.5% unemployment rate. Unfortunately, mainly highly skilled and white collaredworkers felt the legislations actual impact, where France actually faced severe labor shortages.

The government had even gone so far as to raid companies where employees were suspected ofworking more than the legal number of hours, and the CEO of one company faced fines that

7Euroneurosis,The Economist, May 9, 1998, p. 15.8Julia Lichtblau, The Dow Jones Guide to the World Stock Markets, 1994, pp. 98-101.9Melissa Poasgay, France Telecom Sale Drives Popular Capitalism,Bloomberg, Oct. 17, 1998.


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totaled nearly $17,000.10

By enacting a law that the Wall Street Journal called mindless thegovernment had given even more power to the pilots union.11

French unions were notorious for their willingness to strike, and their lack of flexibility duringnegotiations. The influence of the French lorry (truck) drivers union on the government and

economy of France between 1996 and 1997 illustrates the nature of these costly labor disputes. InSeptember 1996 the French Prime Minister Alain Juppe announced major tax reforms aimed atdiffusing worker discontent and impending strikes.12 Despite these measures the lorry driversunion went on a 12 day strike in the winter of 1996, to protest unpaid hours. Within a year, the

lorry drivers went on strike again to protest their employers alleged failure to live up to theagreements reached a year earlier. This strike included drivers setting up 150 roadblocks acrossthe country, affecting main border crossings with Spain, Germany and England, and paralyzing

freight traffic for three days. Police eventually intervened to assure that British truck driverscould return home from France and that main border crossings were kept open. 13

Air Frances own experience epitomized this same issue: During the summer of 1998 as Paris was

preparing to host the World Cup, the pilot union had walked out. At the time Air France wastrying to negotiate equity participation among pilots in the upcoming privatization. While the

pilots returned to work the day before the World Cup started, the dispute was not resolved untilNovember.14 Meanwhile observers estimated that the walkout had reduced the airlines netprofitability by at least a half a billion francs and had forced the privatization to be delayed until

February of 1999.15

A Common Currency

January 1, 1999 marked the first step in the merger of currencies among 11 of the 15 members of

the European union. England, Sweden and Denmark chose not to join the first wave and Greece

failed to qualify for inclusion. The participating members, including Germany and France, agreedto tie their currencies to the new Euro and to allow the central bank located in Frankfurt,

Germany to largely control their collective monetary policy. As part of the transition, the 11countries could continue to use their national currencies, and prices would be listed in both Eurosand the national currencies. Stock prices in the 11 countries were listed in Euro. The Euro would

not circulate as bills and coins until January 1, 2002, when the national currencies were phasedout. The national currencies of member countries would cease to be legal tender by mid 2002.

10Margaret Coker, BustedFor Working Hard,Business Week, May 3, 1999, p. 64.11

Time Clock Gendarmes, The Wall Street Journal, June 22, 1998, Section A, p. 22, Column 1.12Paula Dwyer, Tax cuts or strikes? A lose-lose proposition for France, Business Week,September 23, 1996, p. 62.13

French blockade begins to bite, The Guardian, November 4, 1997, p. 3.14Air France; Labor Agreement,Air Transport World, November 1998.15Pierre Sparaco, Air France Pilots To Approve New Pact,Aviation Week & Space Technology,

New York, November 9, 1998.


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This currency union was likely to have a drastic effect on the capital markets of Europe and globalinvesting in general. Financial experts had a variety of opinions as to the success of the union andits effects on the markets. Many anticipated a decrease in the risk of investing in an individual

country because of the elimination of individual currency fluctuations. However, this wasexpected to be somewhat offset by the loss of the advantage of currency diversification. The

ability to invest in Euro, rather than in some of the smaller currencies, increased the volume andliquidity of European markets. In light of the lower risk and increased liquidity, allocations toEurope within global investors' portfolios also increased.

Air France

Air France was one of the worlds largest airlines. In terms of size in 1998 it was 2nd in aircraft

maintenance, 3rd

in international freight and 4th

in international passenger transport. During 1998Air France boasted 281 destinations in 88 countries and had flown 35.6 million passengers duringthe year. Despite the pilot walk out in the summer, 1998 had been a year of record profitability

for Air France (see Exhibit 5 for Air Frances financial statements). The impending privatization

had helped to impose a degree of financial discipline and conservatism that had previously beenlacking in the company.

Like most airlines, Air France was faced with high fixed costs and the need to upgrade its fleet

and to form global alliances (see Exhibit 6 for data on comparable airlines). The majority of AirFrances cargo and passenger fleets would need to be replaced in the next 5-7 years. It was

hoped that by selling off much of the company, this could be accomplished with as little externaldebt as possible. As the company was preparing to go public, it was trying to decide whether toenter into a global alliance with Delta or Continental. The advantages of such alliances were

undisputed: reservation and flight code sharing, and access to non-domestic markets. Observersfelt that both the fleet upgrade and a new alliance would be beneficial in furthering Air Frances

attempt at fiscal discipline.

Conclusion

Despite the problems inherent in doing business in France, most investors were more than willingto make an investment in what would essentially remain a state monopoly. There was little doubt

that any French government, and especially that of Jospin, would continue to pass legislation thatprotected French companies from competition.

Patty Graces dilemma then was not only whether to invest in Air France, but rather, when andwhere she should recommend her clients purchase shares of the company. Would the remainderof the 49% stake of Air France that was purportedly for sale actually be put on the block? Where

would her clients find the best value? Patty continued to ponder these issues as she began typingher recommendation.


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Exhibit 1


Markets Information and Statistics

(December 31, 1998)

GDP(million

US$)

MarketCapitalization(million US$)

ValueTraded(million

US$)

No. ofListed

DomesticCompanies

TurnoverRatio

P/ERatio

DvdndYld(%) P/BV

% Chanin Inde

from1997

US 8,759,950 13,451,352 13,148,480 8,450 103.2 30.2 0.8 5.14 26.7

apan 2,930,000 2,495,757 948,522 2,416 40.3 185.2 1.0 1.6 70.1

Germany 1,813,000 1,093,962 1,390,798 741 144.9 26.3 2.7 -- 27.1

UK 1,252,000 2,374,273 1,167,382 2,399 23.4 20.4 2.5 3.83 15.8

France 1,320,000 991,484 572,151 711 68.7 24.7 1.9 -- 41.6

Korea 584,700 114,593 137,859 748 184.7 -47.1 0.9 0.9 122.0

ndonesia 602,000 22,104 9,709 287 59.4 -106.2 0.8 1.5 -28.8

HongKong 186,810 343,394 489,365 658 54.4 8.9 5.2 -- -18.2

Thailand 369,000 34,903 20,734 418 71.2 -3.6 0.6 1.2 32.7

Malaysia 215,400 98,557 28,835 736 30.9 21.1 2.5 1.3 1.4

Mexico 815,300 91,746 33,841 194 28.6 23.9 2.7 1.4 -37.3

Brazil 1,053,200 160,887 146,594 527 71.0 7.0 7.8 0.6 -38.9

Chile 184,600 51,866 4,419 277 7.2 15.1 4.1 1.1 -27.5

Argentina 374,000 45,332 15,078 130 35.0 13.4 4.0 1.3 -26.0


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Exhibit 2


Market Capitalization Growth

Developed Markets

0

1

2

3

4

5

6

7

1986 1988 1990 1992 1994 1996 1998 2000

Multipleof1987BaseYearValue

US Japan Germany UK France

Emerging Markets

0

5

10

15

20

25

1986 1988 1990 1992 1994 1996 1998 2000

Multipleof1987BaseYearValue

France Mexico China South Africa Brazil Thailand


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Exhibit 3


Price Index Correlations

December 1993 December 1998

US, S&P 500 1

UK, FTSE 100 0.6 1

Japan, Nikkei 0.40 0.4 1

Brazil 0.4 0.3 0.31 1

China 0.1 0.1 -0.1 0.4 1

Colombia 0.1 0 0.13 0.3 -0.1 1

India 0.2 0.20 0.16 0.3 0.21 0.28 1

Indonesia 0.4 0.30 0.33 0.40 0.11 0.17 0.3 1

Korea 0.2 0.3 0.54 0.1 0.02 0.09 0 0.4 1

Malaysia 0.5 0.3 0.22 0.3 0.17 0.01 0.2 0.5 0.2 1

Mexico 0.5 0.4 0.26 0.6 0.13 0.00 0.3 0.3 0.1 0.3

Poland 0.4 0.3 0.26 0.50 0.04 0.12 0.3 0.2 0.2 0.3 0

Portugal 0.4 0.6 0.34 0.5 0.08 0.06 0.3 0.4 0.4 0.2 0

Russia 0.4 0.5 0.25 0.7 0.31 0.51 0.3 0.6 0.10 0.3 0.

South Africa 0.5 0.4 0.34 0.3 0.14 -0.1 0.1 0.3 0.3 0.50 0

US

,S&P500

UK

,FT

SE100

Japan,

Nikke

i

Braz

il

Ch

ina

Colo

mbia

India

Indones

ia

Ko

rea

Malays

ia

Mex

ico


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Exhibit 5


Air France Financial Statements

Fiscal Year End March 31st(000s US$, except per share data)

KEY FINANCIAL ITEMS

1999 1998 1997

MARKET CAP $3,312,975 $4,139,302 $3,413,165COMMON EQUITY $2,902,810 $2,548,650 $1,269,501

TOTAL ASSETS $10,954,389 $11,038,014 $10,482,330SALES $9,767,999 $9,802,598 $8,170,888

NET INCOME $267,715 $302,557 $69,880

FIVE YEAR SUMMARY

Year Sales Net Income EPS

1999 $9,767,999 $267,715 $8.331998 $9,802,598 $302,557 $9.641997 $8,170,888 $69,880 $3.711996 $8,523,666 ($449,653) ($21.28)

1995 $11,083,521 ($590,275) ($66.94)

Balance SheetAssets 1999 1998 1997

CASH & SHORT TERMINVESTMENTS $1,788,913 $2,032,333 $2,318,213CASH $77,893 $112,531 $105,635ST INVESTMENTS $1,711,020 $1,919,802 $2,212,578RECEIVABLES (NET) $1,760,603 $1,762,388 $1,542,444TOTAL INVENTORIES $214,041 $220,541 $85,196

CURRENT ASSETS $3,763,557 $4,015,262 $3,945,853INVST IN UNCONSOLIDATEDSUBDRS $115,693 $87,829 NAOTHER INVESTMENTS $113,239 $144,659 $274,556PROPERTY, PLANT & EQUIP - NET $6,719,713 $6,542,115 $5,759,520OTHER ASSETS - TOTAL $242,187 $24,799 $502,401

TOTAL ASSETS $10,954,389 $11,038,014 $10,482,330

Liabilities 1999 1998 1997

ACCOUNTS PAYABLE $1,043,205 $1,050,232 $848,467SHORT TERM DEBT & CURRENTPORT $486,502 $580,251 $446,259INCOME TAXES PAYABLE $2,782 $4,036 NAOTHER CURRENT LIABILITIES $1,735,239 $1,666,487 $1,277,106

CURRENT LIABILITIES $3,267,727 $3,301,007 $2,571,833LONG TERM DEBT $3,613,335 $3,922,751 $4,569,879PROVSION FOR RISKS &CHARGES $1,154,971 $1,268,836 $996,435DEFERRED TAXES ($9,491) ($24,379) NAOTHER LIABILITIES NA $161 $157,008

TOTAL LIABILITIES $8,026,542 $8,468,375 $8,295,155

TOTAL LIABILITIES &SHAREHOLDERS EQUITY $10,954,389 $11,038,014 $10,482,330

*financial data has been modified by case writers to be morecompatible with GAAP standards

**fx rate: 1997 = 5.64FRF/$1, 1998 = 6.19FRF/$1, 1999 = 6.11FRF/$1


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Exhibit 6


Summary of Comparison of Selected Airlines as of December 31, 1998(In millions, except per share data and where noted)

British Air KLM Northwest Deltai

AMR Continental UAL ANAh,o

Air Franc

Market Valuation

Stock Price:

High $114.8 $66.3 $65.3 $72.0 $89.9 $65.1 $97.5 $5.7 NA

Low $52.1 $30.7 $18.6 $45.7 $45.6 $28.9 $55.3 $2.8 NA

Close $67.8 $30.0 $25.6 $57.5 $59.4 $33.5 $59.7 $3.3 NA

P/E:a

23.6 9.5 7.6 8.0 9.0 8.1 11.2 357.8 12.3

Shares Outstanding 103.80b 46.11 79.98 138.55c 161.35c 64.78c 51.80c 1,442.73 198.48

Betal

0.95 0.95 1.15 1.10 0.75d

1.25 1.15 NA 0.65q

Current Assets $4,158.6h

$2,460.0h

$1,870.1 $2,672.0 $4,875.0 $2,354.0 $2,908.0 $3,290.4 $3763.6

Current Liabilities $4,960.4h

$2,148.8h

$3,461.7 $5,392.0 $5,639.0 $2,442.0 $5,668.0 $3,192.7 $3267.7

LT Debt $10,233.0 $3,765.3 $4,278.8 $1,952.0 $4,200.0 $2,480.0 $4,971.0 $6,694.5 $3,613

Shareholder's Equity $3,715.9 $2,319.0 $348.1 $4,623.0 $6,698.0 $1,193.0 $4,072.0 $931.7 $2,902

Book Value/Share $35.80e

$47.47 -$6.48 $31.96f

$41.51g

$18.42f

$71.56f

$1.02 $14.62

Depreciation $930.6 $398.0 $427.0 $961.0 $1,287.0 $294.0 $793.0 $609.0 $813.9

Operating Results

Revenues $14,353.0h

$6,500.4h

$9,044.8 $14,711.0 $19,205.0 $7,951.0 $17,561.0 $8,882.4 $9,768Five Year Annual Rate ofChange/Share 4.5% 4.0% -2.5% -3.5% 2.5% 6.5% 12.0% NA NA

Net Income $362.2 $222.4 -$242.0 $1,101.0 $1,306.0 $464.0 $827.0 -$39.3 $267.7

Earnings Per Share $3.49e

$4.77 -$2.95 $7.20 $7.48 $6.02 $6.83 -$0.03 $1.36

Cash Flow/Sharej

$12.46e

$13.36 $2.30 $14.80 $16.07 $11.36 $29.30 $0.27 $3.82

Five Year Annual Rate ofChange/Share 16.5% 10.0% 6.0% 36.0% 14.0% NMF 27.0% NA NA

Dividend Payout:

1996 $2.57 $1.20 $0.00 $0.10 $0.00 $0.00 $0.00 $0.02 $0.00

1997 $3.05 $0.47 $0.00 $0.10 $0.00 $0.00 $0.00 $0.02 $0.00

1998 $3.39 $1.49 $0.00 $0.10 $0.00 $0.00 $0.00 $0.00 $0.00

Return on Total Capital 3.8% 5.2% 9.2%k

18.3% 13.4% 15.1% 10.9% NA 5.74%

Return on Shareholders' Equity 9.7% 9.6% 32.1%k

23.8% 19.5% 38.9% 20.3% NA 10.36%

Load Factor 70.7% 75.1% 73.1% 72.6% 70.2% 72.1% 71.6% 63.2% 75.50%

Breakeven Load Factor 63.4% 70.7% NA 62.5% 59.9% 61.4% 61%n

NA NA

Revenue Passengers 45.05 NA 50.50 106.90 NA 43.63 87.00 NA NA

Available Seat Miles (billions) 111.0 46.1 91.3 144.0 155.3 74.7 174.0 56.7 62.8

Revenue Passenger Miles (billions) 78.2 35.6 66.7 104.6 109.0 53.9 124.6 36.1 47.4Revenue Yield Per PasserngerMile

mNA NA 11.26 12.83 13.49 12.62 12.36 17.16 NA

Cost Per Available Seat Milem

NA NA 9.21 8.92 9.25 8.93 8.76n

15.63 NA

Revenue Per Available Seat Milem

NA NA 9.12 10.22 9.46 9.10 10.07 NA NAfuel gals consumed 2730 1487 3029

ave price per gal of feul 48.66 49.83 46.83 59.0aAverage annual P/E ratio

bIn millions of ADRs. 1ADR = 10 ordinary shares

cAdjusted for stock split

dAMR beta as of 2000, following spin-off of Sabre, a company that provides for the electronic distribution of travel through its computer reservations system.

ePer ADR

fIncludes intangibles

gIncludes route acquisition costs

hFiscal year end 3/31/99

iFiscal year end 6/30/99

jCash flow is defined as earnings plus non-cash

chargesk

1999 numberslData from September 15, 2000 Value Line

mIn U.S. cents

nExcluding ESOP charges

oFigures translated into US dollars at 120.55=US$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 1999.

pFigures translated into US dollars at the rate of FRF 6.11/US$

qBeta reported 12/2000

rExcluding deferred taxes and long-term recievables

sCalculated because Air France does not report current liabilities

24 air france

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