Air France-KLM Braces for $9.3B Fuel Surge

Air France-KLM expects its fuel bill to reach $9.3 billion this year, up $2.4 billion compared to last year. That’s higher than the $2.0 billion Group CEO Ben Smith guided some weeks ago after the war in the Middle East started. In response, the airline group intends to slightly trim capacity on long-haul flights operated by Air France and KLM, as well as on some Transavia France flights. The group reported a consolidated net loss of €252 million for Q1, almost flat with last year's €-249 million. Revenues were up by 4.4 percent to €7.5 billion, and expenses were flat at €7.5 billion. The operating result improved to €-27 million from €-328 million last year, but the operating margin was 0.4 percent, despite a 4.2-percentage-point improvement year-over-year. CFO Steven Zaat stated that these results were somewhat “surrealistic”, as they don’t fully include the higher fuel costs from March. They accounted for €86 million in the operating results bridge, but the fuel bills for March were actually due a couple of weeks later. At the same time, the effects of reduced capacity by the Gulf carriers were immediately evident in higher revenues (the aforementioned €7.5 billion) and in higher unit revenues of € 214 million. Thanks to disciplined cost management, higher productivity, and lower fuel costs from more new-generation aircraft, Air France-KLM only increased unit costs by 0.5 percent. They would have been flat without the 0.5 percent paid out in customer compensation for cancelled flights because of the winter weather at KLM’s home base in Amsterdam. [caption id="attachment_191516" align="aligncenter" width="489"] KLM Boeing 737-700[/caption] Airlines Looking at the individual airlines, Air France produced a tiny €11 million operating profit. However, this is an improvement from the €-183 million reported in Q1 last year. The operating margin improved by 4.4 percentage points to -0.2 percent, driven by higher passenger unit revenues and lower unit costs. Revenues were up by 5.1 percent to €4.6 billion, and capacity grew by 4.1 percent. Salaries and other costs grew by 3.2 percent, which is more than at KLM. KLM ended Q1 with a €114 million operating loss, although an improvement over the €199 million loss from last year. This includes €90 million from the impact of winter weather in February. The operating margin improved to -3.8 percent from -6.7 percent. Cost savings from the Back on Track program contributed with €159 million to the results, offset by higher airport fees at Schiphol and increased labour costs. KLM also sold its Catering Services unit to Gategroup. Revenues were up by 1.4 percent to €3.0 billion and significantly better in March, allowing KLM to partly recover from the difficult first two months. KLM grew capacity by 3.9 percent. Gulf effect Both Air France and KLM benefited from the reduced capacity of the Gulf carriers. The conflict had little effect on the two carriers themselves, as the Gulf region accounts for just 2.1 percent of the group’s global capacity. This was redeployed onto other markets. Customers booked more non-Gulf airlines, driving yields up by 3.5 percent and capacity by 4 percent. Yields were especially high on the network to Asia (up 8.7 percent), Latin America (up 6.7 percent), and North America (up 5.7 percent). Premium yields for First and Business Class grew by 6.3 percent, those for Premium Economy by 5.5 percent. [caption id="attachment_191519" align="aligncenter" width="503"] Airbus A321neo Transavia[/caption] Transavia Leisure airlines Transavia and Transavia France widened their combined loss to €232 million from €205 million last year. Revenues grew by 8.6 percent to €571 million, with capacity up by 13.3 percent. Transavia’s operating margin is extremely low at -40.7 percent, down from -39 percent year-over-year. Part of this comes from costs associated with Transavia France taking over Air France's slots at Paris Orly, except for some Navettes public routes to Corsica. This transfer of the AF network is showing early positive results, with April bookings for Transavia France at Orly up 28 percent. But overall, the two Transavias are focused on reducing unit costs and improving the profitability of their networks. Fuel Back to fuel. Ben Smith said there is no shortage of jet fuel until at least the end of Q2, although there could be problems in some areas of Asia. Air France-KLM thinks it is pretty well covered for Q2, with 70 percent of fuel hedged. Still, the fuel bill will be up by $1.1 billion year-over-year, with another $800 million expected in Q3 and $500 million in Q4. “But that depends on what is posted on the Truth Social platform and can change by the day”, Steven Zaat added. Based on the first 24 days of April, Zaat has seen passenger yields 9 percent higher year-over-year, excluding currency effects. “That recaps around 60 percent of the fuel price increases in April, but we are unable to fully compensate all costs through our revenues.” He stressed that this is a proxy situation for Q2 only, as Q3 and Q4 offer no visibility. Full-year long-haul capacity growth will be reduced from 4 percent to between 2 and 4 percent, but short- and medium-haul will remain unchanged. Transavia will grow more slowly, at 8 to 10 percent, compared to the previously planned 10+ percent. “Our teams did extensive studies on which flights would be flight contribution positive despite the fuel prices. Almost 99 percent of what we fly in the summer will be flight contribution positive”, said Smith. Depending on the situation, the retirement of older, less efficient Airbus A330-200s could be accelerated to the end of this year. “We have already planned to retire the fleet at Air France next year and shortly after the A330-200s at KLM. But as of now, we plan to fly pretty much the entire schedule until the end of Q3.” Air France-KLM will also trim Capex to keep it below €3.0 billion. Full-year unit costs are expected to increase by 1 to 2 percent. It therefore helps that Amsterdam Schiphol Airport has temporarily reduced airport fees by 10 percent to help airlines in the current high-cost environment. “It is the first time we hear something positive coming out of Amsterdam Schiphol”, Smith remarked. Last year, Schiphol raised fees by 41 percent. [caption id="attachment_191521" align="aligncenter" width="543"] KLM TAP Air Portugal[/caption] TAP Air Portugal Ben Smith said on the earnings call that the Portuguese government has invited his airline to make a binding offer on TAP Air Portugal. This follows on the non-binding offer made on April 2. “We have indicated our intent to make a binding offer, and we will do that in the coming weeks. The strategic importance to us remains the same: Lisbon's geographical location. To build on our already strong position in Latin America is still very important, with Brazil being our most important market.” CFO Steven Zaat added, “We will do a more in-depth due diligence. We had access to the data room, as did other competitors for this bid (Lufthansa Group). We will now do due diligence on the financials and the legals. We will most likely make a binding offer by the end of July or in early August.

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