Air France KLM (EPA: AF) shares should rise 1,000% at the open today. AF shares rising by 10x should not be taken as a sign that they’ve finally learnt how to run an airline of course – this is a purely technical change. One that moves the nominal price but doesn’t change anything real. We can also take this to be a conformity with fashion, possibly cultural practice.

For those who don’t know, or haven’t had the joy of flying with Air France: “Air France-KLM SA, together with its subsidiaries, provides passenger and cargo transportation services and aeronautical maintenance in Metropolitan France, Benelux, rest of Europe, and internationally. The company operates through three segments: Airframe maintenance, Engine Maintenance, and Component Support. It offers airframe maintenance, electronic, mechanical, pneumatic, hydraulic, and other services.” The other way of thinking of this is that it’s the old national carrier airlines of France and Holland merged into the one beast.

The problem is simply that, like every other airline, Air France KLM was hard hit by covid and lockdowns. Sure, there were varying levels of government support to get everyone through those times but the business clearly got hit hard by no one being able to move at all let alone take a jet flight. This has crashed the share price, equally obviously. Yes, recovery is happening but even so.

Air France

Air France KLM share price from Google Finance

The issue here is that there’s a fashion, a cultural thing, in stock markets. There’s an idea of what the “right price” for a share is. This does vary across markets which is how we know it is a cultural thing. In New York it’s usually $10 to $100, in London £1 to £10 – that’s why US ADRs of London stock are so often 10 pieces of the London stock – to be in the right range in both places. OK, so this is a stock with the main quotation in Paris but the same base idea holds. Below a range it’s thought of as “too cheap”.

So, a technical change to raise it. Simply declare that 10 old shares are now one new one – a one for ten reverse stock split: “The reverse share split will result in the allocation of 1 new ordinary share with a par value of 10 euros for 10 existing ordinary shares with a par value of 1 euro, and in a division by 10 of the number of outstanding shares.” This takes effect at the open of trade this morning.

This doesn’t change the market capitalisation of Air France KLM, just the number of shares that makes it up. Therefore the share price will react, mechanically, by rising 1,000%, or 10x.