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AIR FRANCE - KLM : THIRD QUARTER 2017 RESULTS STRONG OPERATING RESULT DRIVEN BY SOLID TRAFFIC AND INCREASE IN UNIT REVENUE
The Board of Directors of Air France-KLM, chaired by Jean-Marc Janaillac, met on 2 of November 2017 to approve the accounts for the Third Quarter 2017.
Jean-Marc Janaillac made the following comments: "The strong operating performance achieved by the Group in the third quarter reflects a sustained execution on our strategic priorities, as well as a robust business environment translated into solid traffic and unit revenue trends. We continued to move forward notably with the expansion of our network of strategic alliances and the implementation of a new distribution model. At the same time, we relentlessly pursued our efforts to strengthen our financial structure. All of these accomplishments demonstrate that Air France-KLM is well on track to deliver on Trust Together strategic priorities of growing revenues and improve competitiveness."
The combined Passenger and Cargo operating result amounted to 782 million euros in Q3 2017, an improvement of 235 million euros at constant currency, driven by improvement in unit revenue in both Passenger and Cargo.
The Passenger unit revenue continued to improve in Q3 up 3.7% at constant currency. On long haul, there was a strong premium class performance with unit revenues up by 8.3%, while economy class was up by 3.1%. The improvement continued to be driven mainly by the strong recovery in Asia with unit revenue up 8.8%, and Latin America up 12.1%.
During Q3, the improvement in the Cargo performance was driven by an unit revenue increase of 3.8% at constant currency, confirming the continuation of the turnaround.
Continuing traffic growth (+5.5%) and strong unit revenue rise (+9.3%) resulted in a significant increase in Transavia's revenue (+13.3%). In combination with a decrease in unit costs by 4.8%, this performance led to a strong Q3 operating profit of 164 million euros.
Over the period, the Maintenance order book has further increased to a record high of 10.4 billion dollars end September 2017, exceeding the 2017 target. Margins remained at a solid level taking into account OEM supply chain pressure in engine business and change in product and business mix from mature to new contracts
The Q3 operating result is 1,022 million euros which is an improvement by 285 million euros compared to last year. The main items contributing are the positive trend in Group's unit revenues resulting in an increase of 266 million euros, whereas the decrease in fuel price including hedge results contributed 61 million euros.
Adjusted for the interest portion of operating leases, the operating margin stood at 15.3% versus 11.9% at Q3 2016.
The reported Q3 unit cost per EASK is down -0.8%.
On a constant currency, fuel price and pension-related expense basis the unit cost was up 0.6%, impacted by higher flight variable costs related to the increasing load factor and by profit sharing. Excluding these effects, the unit cost at constant currency, fuel price and pension expense is down -1.6% in Q3.
Productivity, measured in EASK per FTE, increased by 2.7% while capacity increased by 1.9%. The average number of staff decreased by 700 FTEs including an increase in Pilots by 100 FTEs and in Cabin crew by 600 FTEs. Ground staff FTEs reduced 1400 FTEs. Net employee costs were stable before profit sharing which increased by 99 million euros.
The Third Quarter 2017 fuel bill amounted to 1,148 million euros, down -96 million euros compared to previous year.
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Year to date, operating free cash flow is positive at 793 million euros up 543 million euros compared to last year.
The net debt at 30 September 2017 stood at 2,796 million euros, a reduction of 859 million euros compared to 31 December 2016, driven by the improvement in both EBITDA and working capital. The adjusted net debt decreased by 656 million euros to 10,510 million euros. The ratio adjusted net debt / EBITDAR, twelve months trailing, has decreased to 2.4x, achieving the target to be below 2.5x.
Following a change in Dutch pension regulation and in order to mitigate its risks, KLM has conducted negotiations with its cockpit and cabin crew to adjust their pension schemes.
An agreement has been reached between KLM and the Dutch Airline Pilot VNV to modify the pilot pension scheme, subject to the approval of the VNV members. The future scheme is expected to be qualified as a collective defined contribution scheme, and according to IAS 19, the de-risking of the pilot pension fund will lead in Q4 to the derecognition of the "Pension asset" of the Group's balance sheet through non-current expense in the P&L.
Another agreement with Cabin crew has been reached in August 17 on a collective defined contribution scheme. The impact on the Group equity and related P&L non-current (and non-cash) expense amounts 311 million euros (net of tax EUR 233 million euros) in Q3 2017
The reserved capital increase allowing Delta and China Eastern to acquire 10% of Air France-KLM has been completed per October 2017 for an amount of 751 million euros.
The exercise by Air France-KLM of the soft call of the OCEANE 2023 will lead to a further debt reduction up to 520 million euros per 15 November 2017.
With these operations, Air France-KLM will continue the deleveraging of the Group.
In order to best serve customers, Air France KLM is embracing NDC (New Distribution Capability, an enriched IATA messaging standard allowing the distribution of rich content and personalized offers), and investing in options for travel partners to access, book and sell it.
At the same time, in order to adapt to market circumstances and to further improve its efficiency, Air France KLM will implement a Distribution Surcharge on GDS sales, effective from April 1st 2018. The surcharge does not apply to travel agency sales via an NDC connection and to Air France and KLM direct sales channels.
A complete re-engineering of the Group's loyalty program Flying Blue will be announced on 6 November and will be launched on 1st April 2018, with the purpose to enrich the travel experience, stimulate the loyalty towards our airlines and maximize the attractiveness.
The global context remains highly uncertain regarding the geopolitical environment in which we operate and regarding fuel prices.
In a context of dynamic demand, the capacity growth in Q4 2017 will be 3 to 4% for Passenger network and 6 to 7% for Transavia.
For the passenger network, the long haul forward bookings for the coming four months stand above last year's levels and, based on the current outlook, the variation in unit revenue is expected to be positive in Q4 2017 compared to the previous year.
The fuel bill in euros is expected to be stable in Q4 2017 compared to 2016. In 2018, it is expected to be stable in euros and up 300 million dollars compared to 2017 .
The Group is pursuing its initiatives to reduce unit costs. For full year 2017, unit cost evolution at constant currency, fuel and pension charges is expected slightly negative, and between -1.0 to -1.5% excluding load factor and profit sharing effects.
The Group is continuing to improve its financial structure. The operating free cash flow 2017 is expected above last year, with a capex at 2.2 billion euros. With the reserved capital increase and the conversion of the OCEANE, the adjusted net debt to EBITDAR is expected between 2.2x and 2.3x at the end of the year (before the acquisition in 2018 of a 31% stake in Virgin Atlantic).
In 2018, the early implementation of IFRS 16 is expected, in a first assessment, to result in a consequential reduction of net debt of at least 1.5 billion euros compared to adjusted net debt (based on 31st December 2016 figures).
These initiatives show that Air France-KLM is resolutely committed to implementing Trust Together strategic priorities, by regaining the offensive and improving competitiveness.
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The Third Quarter 2017 accounts are not audited by the Statutory Auditors.
The results presentation is available at www.airfranceklm.com on 3 of November 2017 from 7:15 am CET.
A conference call will be hosted by Mr Gagey (CFO) on 3 of November 2017 at 8:30am CET.
To connect to the conference call, please dial:
Confirmation code: 7819012
To listen to the audio-replay of the conference call, please dial:
Confirmation code: 7819012
+33 1 49 89 52 59 +33 1 49 89 52 60 +33 1 41 56 56 00
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