Air France-KLM reports deep operating loss for FY2011, needs “Transform 2015” plan to deliver

9 March, 2012

Air France-KLM has reported an operating loss of EUR353 million for 2011, a significant turnaround from its 2010 profit of EUR28 million - and follows Lufthansa's 18% year-on-year decline in operating profit to EUR820 million last year. This has been a difficult year for the Franco-Dutch airline group, as it battled rising fuel prices and uncertainty across many of its markets. The start of 2012 saw the Group launch ‘Transform 15’, its turnaround programme aimed at restoring profitability. The 2011 loss emphasises the need for this programme to deliver results, given a continuing uncertain outlook as Europe's economic troubles persist amid high fuel prices.

The Group’s revenue was unable to absorb rising fuel expenses; although total revenues increased by 4.5% year-on-year to EUR24.36 billion, operating costs rose 6.2% to EUR24.72 billion. Fuel expenses alone surged 16.3% year-on-year.

Air France-KLM passenger traffic increased 6.9% year-on-year accompanied by a 6.6% rise in capacity and consequent passenger load factor increase of 0.3 ppt, to 82%. The cargo side of the business declined 1.2% while capacity increased 2.4%, resulting in a decrease in average cargo load factor of 2.4 ppts, to 66.4%. The results are influenced somewhat by the volcanic disruption of 2010 which caused a decline in earnings over a period in 2Q2010.

Air France-KLM: Key data by business

Despite the result, the Group retains a high level of liquidity at EUR2.9 billion cash as at 31-Dec-2011. This increased by a further EUR467 million from the Group’s partial sale of Amadeus in Feb-2012.

The “Transform 2015” plan; includes capacity reduction

On 11-Jan-2012 Air France launched its new transformation plan, ‘Transform 15’, designed to reduce the Group’s debt by EUR2 billion by the end of 2014. This plan replaces the airline’s ‘Challenge 12’ cost savings programme, launched in 2007 and credited with generating EUR2.9 billion in cost savings. The Group’s new plan aims to return the carrier to profitability through reducing unit costs by 10% (excluding fuel) and reducing debt by EUR2 billion by the end of 2014.

The Group has already taken steps towards implementing the plan, including revising down capacity growth from 4.7% in 2011 to 1-2% annually until 2015.

Air France-KLM: Limited capacity increases

The reduced capacity increases flow through to decreases in investments, particularly on the Group’s fleet. The Group spent EUR1.2 billion on fleet activities in 2011, however this will be limited to a maximum of EUR700 million in 2012, EUR600 million in 2013 and EUR300 million in 2014.

The Group has also already introduced a freeze on salary increases at Air France and “wage moderation” at KLM, moves expected to generate more than EUR1 billion in savings over the next three years. They will however not be popular with staff and unions.

Transform 2015’s first phase is to end at the end of Mar-2012 following the Group reaching an agreement with employee unions to define working methods and productivity improvements, as well as measures to achieve these improvements. The Group aims to sign new collective agreements with staff by the end of Jun-2012 and the combination of these developments is expected to generate a 20% improvement in economic efficiency in 2014 in comparison to 2011.

The second phase of Transform 15 will involve returning its medium-haul operations to break-even and turning around its cargo business. Profitability improvements are to be made on the Group’s long-haul network, achieved through closures of particular routes and repositioning of specific in-flight product, according to the route. Maintenance operations are also to be improved through subcontracting “certain airframe activities”.

Short-haul changes in south of France

Air France’s ‘commercial offensive’ is set to continue in the south of France, where it is adapting its product to better compete with the growing low-cost carriers in the market. Having launched the strategy in Marseille in Oct-2011, Air France plans to implement the strategy in Nice and Toulouse in Apr-2012. Bordeaux is set to follow later in 2012.

See related article: Air France’s new regional strategy takes one step backwards as four new routes are pulled back

Investment in product, while fleet expansion is reined in

Aside from the transformation programme, Air France-KLM is attempting to strengthen its operations through continual investment into its product and making its hubs more attractive to travellers. The airline is also looking to deepen its alliances in order to strengthen its position in key markets.

As at 31-Dec-2011 the Air France-KLM Group had a fleet of 609 aircraft; 402 operated by Air France and 207 operated by KLM. Of Air France’s fleet, 202 were owned, 52 held on a finance lease and 148 on operating leases. Of KLM’s fleet, 69 were owned, 65 held on a finance lease and 73 on operating leases.

“Uncertainty” clouds the Group’s outlook; 1H2012 to be down y-o-y

Air France-KLM views 2012 as yet another difficult year in prospect, not solely due to the Group’s new transformation plan, but because of continued market uncertainty in Europe and volatile fuel prices.

The Group expects its fuel expenses to rise by EUR1.1 billion in 2012. After 2011’s natural disaster in Japan – an important high yield market for Air France in particular - there followed economic crises in Europe and political instability in North Africa and the Middle East. The political situation remains volatile in some important markets for the Group. On 07-Mar-2012 Air France announced the indefinite suspension of Paris CDG-Damascus service due to the increasing violence in Syria.

The Group warned its 1H2012 results will be lower than 1H2011 however 2H2012 should show some positive effects from the first steps taken in the ‘Transform 2015’ programme. The Group will continue to work towards reducing its debt in 2012, with the aim to have a maximum debt of EUR6.5 billion by the end of the year.

Much will depend on union and staff take-up of the planned cost reduction plans. Indications to date are that this cannot be taken for granted.

Air France-KLM Financials FY2011

Three months ended 31-Dec-2011:

  • Revenue: EUR6028 million, +1.8% year-on-year;
  • Costs: EUR6262 million, +6.8%;
    • Fuel: EUR1622 million, +20.1%;
    • Labour: EUR1866 million, +1.4%;
  • Operating profit (loss): (EUR202 million), compared to a profit of EUR81 million in p-c-p;
  • Net profit (loss): (EUR259 million), compared to a loss of EUR46 million in p-c-p;
  • Passenger traffic (RPKs): +6.6%;
  • Passenger load factor: 81.8%, +0.4 ppt;
  • Passenger yield: EUR 8.25 cents, -3.2%;
  • Passenger revenue per ASK: EUR 6.74 cents, -2.6%;
  • Passenger cost per ASK: EUR 6.99 cents, +2.1%;
  • Cargo traffic (FTKs): -4.7%;
  • Cargo load factor: 67.5%, -2.9 ppts;
  • Cargo yield: EUR 26.52 cents, +0.4%;
  • Cargo revenue per AFTK: EUR 17.90 cents, -3.8%;
  • Cargo cost per AFTK: EUR 17.63 cents, +4.2%;

12 months ended 31-Dec-2011:

  • Revenue: EUR24,363 million, +4.5%;
  • Costs: EUR24,865 million, +5.7%;
    • Fuel: EUR6438 million, +16.3%;
    • Labour: EUR7460 million, +1.0%;
  • Operating profit (loss): (EUR353 million), compared to a profit of EUR28 million in p-c-p;
  • Net profit (loss): (EUR809 million), compared to a profit of EUR289 million in p-c-p;
  • Passenger traffic: +6.9%;
  • Passenger load factor: 82.0%, +0.3 ppt;
  • Passenger yield: EUR 8.29 cents, -1.6%;
  • Passenger revenue per ASK: EUR 6.80 cents, -1.2%;
  • Passenger cost per ASK: EUR 6.86 cents, +0.4%;
  • Cargo traffic: -1.3%;
  • Cargo load factor: 66.4%, -2.5 ppts;
  • Cargo yield: EUR 26.37 cents, +3.7%;
  • Cargo revenue per AFTK: EUR 17.50 cents, +0.1%;
  • Cargo cost per AFTK: EUR 17.59 cents, +2.7%;
  • Total assets: EUR27,317 million, -3.1%;
  • Cash and cash equivalents: EUR2283 million, -34.7%;
  • Total liabilities: EUR21,223 million, +0.4%.