AFKL Financial Year 2014: Third Quarter results
- Significant impact of Air France pilot strike: estimated negative impact of 416 million euros on revenues and 330 million euros on operating result
- Revenues of 6.7 billion euros, stable (+0.2%) like-for-like
- EBITDA of 682 million euros, down 21 million euros like-for-like1
- Operating result of 247 million euros, down 18 million euros like-for-like1
- Tenth quarter of unit cost reduction: unit cost2 down 1.2% like-for-like1
- Launch of new strategic plan, Perform 2020
 On a constant currency basis and excluding pilot strike impact
 See definition in appendix
First Nine Months of 2014
- Revenues of 18.7 billion euros, up 0.7% like-for-like1
- Operating result of 40 million euros, up 267 million euros like-for-like1
- Net result, group share of -514 million euros, improvement of 117 million euros
- Adjusted net result, group share2 of -231 million euros, improvement of 83 million euros
- Net debt of 5.27 billion euros, down 76 million euros compared to 31st December 2013
The Board of Directors of Air France-KLM, chaired by Alexandre de Juniac, met on 28th October 2014 to examine the accounts for the Third Quarter of the Financial Year 2014.
Third Quarter 2014 activity was strongly affected by 14 days of strike by Air France pilots, which had an estimated negative impact of 330 million euros on the operating result. Total revenues were reduced by an estimated 416 million euros, partly offset by 86 million euros of net savings on costs. The strike led to the cancellation of an estimated 4,249 million ASKs (18% of September ASKs) and 213 million ATKs (16% of September ATKs) resulting in an equivalent cancellation of 4.75 billion EASKs (Equivalent Available Seat Kilometer).
Total revenues amounted to 6,695 million euros versus 7,175 million euros in 2013, down 6.7%, but up +0.2% on a constant currency basis and adjusted for the Air France pilot strike (“like-for-like”). Currencies had a negative 78 million euro impact on revenues.
Operating costs were 1.3% lower year-on-year and 0.7% lower on a constant currency basis. Ex-fuel, they increased by 0.7% and by 0.8% on a like-for-like basis. Unit cost per EASK1 was reduced by 1.2%, on a constant currency, fuel price, pension expense and strike adjusted basis, against capacity measured in EASK up by 2.0%, corrected for the strike. The fuel bill amounted to 1,737 million euros, down 6.4%, but slightly up (+0.4%) on a constant currency and strike adjusted basis. Total employee costs including temporary staff were down 1.6% to 1,871 million euros, and by 1.7% on a constant currency basis. On a constant pension expense and adjusted for the strike, they declined by9 million euros.
EBITDA amounted to 682 million euros, a decrease of 397 million euros. On a like-for-like basis, EBITDA decreased by 21 million euros. The operating result stood at 247 million euros versus641 million euros in 2013, a 394 million euro decrease. Like-for-like, the operating result decreased by 18 million euros. Currencies had a 47 million euro net negative impact on the Third Quarter operating result.
The net result, group share stood at 100 million euros against 148 million euros a year ago. It includes the non current result of the Amadeus transaction (187 million euros), mainly offset by the change in value of the fuel hedging portfolio (-172 million euros). On an adjusted basis4, the net result, group share stood at 111 million euros against 372 million euros in Q3 2013, a 261 million euro decrease.
In the first Nine Months of 2014, total revenues stood at 18,7 billion euros versus 19,4 billion euros in 2013, down 3.6%, but up +0.4% on a like-for-like basis. Currencies had a negative 365 million euro impact on revenues.
Operating costs were reduced by 2.8% and by 1.4% on a constant currency basis. Ex-fuel, they decreased by 1.6%, and by 1.0% on a like-for-like basis. The fuel bill amounted to 4,926 million euros, down 6.1%, and down 0.8% on a constant currency and strike adjusted basis. Total employee costs including temporary staff were down 3.1% to 5,651 million euros, and by 3.0% on a constant currency basis. On a constant pension expense, scope and strike adjusted basis, they declined by 115 million euros as a result of the Transform 2015 actions.
EBITDA declined by 200 million euros to 1,273 million euros, resulting in an EBITDA margin of 6.8%, a 0.8 point decrease on 2013. On a like-for-like basis, EBITDA improved by 224 million euros. The operating result stood at 40 million euros versus 193 million euros in 2013. On a like-for-like basis, the operating result improved by 267 million euros. Currencies had a 92 million euro net negative impact on the operating result in the first nine months of 2014.
The net result, group share stood at -514 million euros against -651 million euros a year ago. It includes the non-current result of the Amadeus transaction (187 million euros), the change in value of the fuel hedging portfolio (-146 million euros), foreign exchange losses (including the adjustment in the value of the cash held by the Group in Venezuela), and the impairment charges related to the Cargo business. On an adjusted basis, the net result, group share stood at -231 million euros against-314 million in the first nine months of 2013, an 83 million euro improvement.
Earnings and diluted earnings per share both stood at -1.74 euros (-2.20 euros in 2013), and at-0.78 euros on an adjusted basis (-1.06 euros in 2013).
 See definition in appendix
In the Third Quarter 2014, passenger revenues amounted to 5,232 million euros, down 8.2% and 0.3% like-for-like. The operating result of the passenger business stood at 211 million euros, versus 584 million euros in Q3 2013, a decrease of 40 million euros on a like-for-like basis (-373 million euros on a reported basis).
The Group maintained its strict capacity discipline, increasing total passenger capacity by only 1.6% excluding strike impact. Unit revenue per Available Seat Kilometer (RASK) remained volatile, down by approximately -1.8% on a like-for-like basis after a +1.3% increase in the second quarter.
On the long-haul network, unit revenue was affected by industry overcapacity on certain parts of the network, a disappointing performance on the Latin American network on the back of lower economic growth in several markets, and high comparables in the third quarter last year (long-haul RASK up 2.9% at Q3 2013 compared to Q3 2012, of which +5.6% on Latin America).
As planned within the framework of Transform 2015, point-to-point (not linked to the Paris-CDG and Amsterdam hubs) short and medium-haul capacity was significantly reduced (down 14.2%, excluding strike impact), leading to a significant improvement in unit revenue (estimated at +7.6% like-for-like). Total short and medium-haul RASK improved by 1.6% like-for-like, in line with the second quarter.
For the 2014-15 Winter season (November 2014 to March 2015), the Group will maintain its strict capacity discipline in the passenger business, with stable capacity (planned ASK growth: +0.1%), notably including a reduction of 11.3% in short and medium-haul point-to-point capacity.
As a result of Transform 2015, and in spite of the low capacity growth, the passenger activity delivered a further decrease in unit cost, with Cost per Available Seat Kilometer (CASK) down by 1.2% like-for-like.
In the first Nine Months of 2014, passenger revenues amounted to 14,709 million euros, down 3.7%, but up 0.8% like-for-like. The operating result of the passenger business stood at 88 million euros, versus 233 million euros in the same period last year. Like-for-like, it improved by 226 million euros.
Unit revenue per Available Seat Kilometer (RASK) fell by 2.9% and by 0.3% like-for-like. Unit costs (CASK) were reduced by 1.9%.
Third Quarter 2014 cargo revenues amounted to 623 million euros, down 9.4% and by 3.6% on a like-for-like basis. The Group continued to reduce full-freighter capacity (down 7% in July and August), leading to a decrease in total capacity of -0.5% on a like-for-like basis. Demand remained weak, with unit revenue per Available Ton Kilometer (RATK) decreasing by 2.1% on a like-for-like basis, and by 3.5% on a reported basis.
The operating result amounted to -102 million euros, down 2 million euros on a like-for-like basis.
In the first Nine Months of 2014, cargo revenues amounted to 1,967 million euros, down 6.0% and by 2.3% on a like-for-like basis. Unit revenue per Available Ton Kilometer (RATK) decreased by 2.9% and by 0.7% on a like-for-like basis.
On a like-for-like basis, cargo unit cost was down 1.7% in the first nine months. The operating result improved by 3 million euros and by 24 million euros like-for-like.
At its Perform 2020 investor day in September, the Group announced the finalisation of its cargo repositioning plan: it is implementing a significant further reduction in its full-freighter fleet, from 14 aircraft in operation in 2013 to 5 aircraft by the end of 2016. This reduction should enable the full-freighter business to return to operating breakeven in 2017 (versus a loss of €110 million in 2013 and a €200 million loss including bellies).
Third Quarter 2014 third party maintenance revenues amounted to 319 million euros, up 4.2% and by 5.3% on a constant currency basis, driven by the consolidation of Barfield, a US component support business. The operating result stood at 61 million euros, up 7 million euros year-on-year. The Air France pilot strike had a 22 million euro impact on operating result due to lower internal revenues from the maintenance of the Air France fleet. Excluding strike impact and at constant currency, the operating result was up 27 million euros.
In the first Nine Months of 2014, third party maintenance revenues amounted to 895 million euros, down 3.5% and by 0.5% on a constant currency basis. The operating result increased by 2 million euros to 113 million euros. Like-for-like, the operating result improved by 31 million euros, representing a 1.2 point increase in operating margin.
Over the period, the Group recorded a 20% increase in its order book to 5.3 billion euros, including a major contract with Air China covering the maintenance of GE90 engines.
In the Third Quarter of 2014, Transavia capacity was up 8.3%, reflecting the accelerated development in France (up 21.4%) and the ongoing repositioning in the Netherlands (with scheduled capacity up 15.3% and charter capacity down 3.7%). Traffic rose 6.0%, and load factor remained high (91.8%, down 1.9 point). Unit revenue was down 0.6%, but up 0.5% in France despite the rapid increase in capacity. Transavia’s total revenue stood at 427 million euros, up 7.6%. The operating result was 62 million euros, down 4 million euros year-on-year.
In the first Nine Months of 2014, Transavia traffic increased by 6.5% for capacity up 6.9%, leading to a 0.4 point decrease in load factor to 90.3%. Unit revenue was down 0.8%. Total revenue stood at 861 million euros, up 5.9%, while the unit cost per ASK decreased by 0.7%, but increased by 0.3% on a constant currency basis. The operating result decreased by 14 million euros to -2 million euros, mainly due to the rapid ramp up in France.
For the 2014-15 Winter season, Transavia will continue its rapid growth in France, with a planned 56% capacity increase (+13.3% including activity in the Netherlands).
In October 2014, Air France and its pilots’ unions finalized a draft agreement relating to the development of Transavia in France. If this agreement is validated, it will ensure the entirety of the Transavia development plan in France over the next five years:
- Continued strong growth in Summer 2015: 21 aircraft in operation versus 16 in Summer 2014, Transavia to become the largest low cost carrier at Paris-Orly by Summer 2015.
- 37 Boeing 737s in operation by 2019, operating flights potentially on departure from all French airports excluding the Paris-CDG hub, notably on destinations already served by Air France.
- Transavia to maintain its own operating and remuneration conditions, which are key to achieving its unit cost and operating flexibility objectives.
Third Quarter 2014 third party catering revenues amounted to 82 million euros, up 5.1%. At constant scope (excluding the impact of the sale of Air Chef that occurred in Q2 2013), third party revenues increased by 6.5%. The operating result increased by 2 million euros like-for-like, corrected for the impact of the Air France pilot strike on internal revenues.
In the first Nine Months of 2014, third party catering revenues amounted to 234 million euros, up 8.8% at constant scope. Like-for-like, the operating result increased by 5 million euros.
In the first Nine Months of 2014, the fall of 200 million euros in EBITDA, primarily due to the Air France pilot strike, translated into a 183 million euro reduction in cash flow before change in WCR and cash out related to Voluntary Departure Plans. The Group disbursed 162 million euros for Voluntary Departure Plans representing nearly all of the cash out expected in the Financial Year.
Change in WCR was also affected by the strike, with delayed sales partly offset by not yet processed reimbursements. Net investments before sale & lease-back transactions stood at 1,106 million euros.
As a result, operating free cash flow amounted to minus 75 million euros, versus a positive 496 million euros a year earlier. Operating free cash flow does not incorporate free cash flow from financial investments, including the cash-in of 339 million euros from the sale of Amadeus shares in September.
Net debt amounted to 5.27 billion euros at 30th September 2014, versus 5.35 billion euros at 31st December 2013. The 12 months trailing net debt / EBITDA ratio stood at 3.2x at 30 September 2014 compared to 3.1x at 31st December 2013. Corrected for the strike impact, it was down to 2.7x.
Delivery on the Transform 2015 plan is fully on track, and several key initiatives of Perform 2020, the new strategic plan covering the period 2015-2020, have been launched.
In July, the tough operating environment led the Group to revise its 2014 EBITDA target to between 2.2 and 2.3 billion euros.
Long-haul industry capacity growth remains high, though lower in comparison to the summer season, and economic activity is recovering slowly in Europe. In addition to the 330 million euro direct impact of the Air France pilot strike on the third quarter operating result, the Group noted the build-up of a delay in fourth quarter booking trends, without being able precisely to apportion responsibility for this delay between the strike and the unfavorable demand trend seen since the early summer and subsequently confirmed. The Group estimates that part of this delay could be progressively reduced over the coming weeks, without being able to quantify this adjustment exactly given the exceptional nature of the event.
As announced on 8 October 2014, all of the above elements could have an impact of around 500 million euros on EBITDA for the 2014 financial year.
Moreover, while continuing to implement the Perform 2020 plan, the Group has the firm intention to limit the financial consequences of the pilot strike and of the weaker unit revenue trend that developed over the past summer. This will be achieved thanks to the further adaptation of its investment plan, the acceleration of unit cost reduction measures, and through dynamic management of its asset portfolio.
The Third Quarter 2014 accounts are not audited by the Statutory Auditors.