Air France-KLM is on track for a strong recovery to profitability and will produce ‘a significantly positive’ operating result in the third quarter. After suffering deep losses in the past couple of Covid-years, the airline group reduced its Q1 net loss by more than half, with even a tiny profit for KLM. Often the weakest of Europe’s three biggest airlines, Air France-KLM in some areas outperformed Lufthansa which also presented its results today. Air France-KLM bullish about recovery in coming quarters.
As for most airlines, the first quarter started weak, with the effects of Omicron clearly evident on bookings and results, added by the effects of the crisis in Russia/Ukraine from February that resulted in a further increase in costs. Despite this, March was a turning point as bookings recovered, notably in premium and corporate travel while leisure further strengthened. The Group received €1.0 billion in proceeds from advanced bookings for the second and third quarters.
Looking at Q1, Air France-KLM posted a €552 million net loss compared to €-1.482 billion in the same period of 2021. The operating loss was €-356 million versus €-1.187 billion last year. EBITDA was €221 million, up from €-628 million last year. Chief Financial Officer Steven Zaat is encouraged that this is now the fourth consecutive quarter with a positive EBITDA. At -7.9 percent, the operating margin is closing in on -4.8 percent for 2019.
Total revenues ended at €4.445 billion, up from €2.161 billion. Expenses were up, notably fuel by €533 million to €996 million, salaries by €355 million to €1.522 billion, and other expenses by €547 billion to €1.706 billion. The Group carried 14.6 million passengers, up from 4.4 million. Performing strongly were the markets to the Caribbean and the Indian Ocean, Africa, and South America, with North America behind on yields.
The airlines continued their transformation plan, which includes a reduction of staff of sixteen percent at Air France and fourteen percent at KLM which will lower staff costs including state support to €1.5 billion this year compared to €2.0 billion in 2019. Air France reduced headcount by 100 FTE in Q1 and has planned a reduction of another 300 FTE later this year.
A slide of Air France-KLM, showing the results for each business unit in Q1 2022. (Air France-KLM)
KLM profitable at just 0.3 million
By airline, KLM produced a €3.0 million net profit, up from €-337 million in Q1 last year and revenues of €1.903 billion, resulting in an operating margin of 0.2 percent. Air France reported a €363 million net loss compared to €-840 million, with revenues at €2.681 billion and an operating margin of -13.5 percent. At +98 percent, Air France ramped up its capacity more drastically than KLM at +38 percent, but the French airline had more staff on standby last year than its Dutch partner.
In Economy class, load factors for the network airlines recovered to eighty percent in March or eight percent of 2019. The gap in Premium is only four percent at 79 percent. Corporate travel on the transatlantic network is already back at seventy percent versus fifty percent at the start of Q1. The total capacity of Air France and KLM was 75 percent.
Transavia and Transavia France were already close to 2019 capacity levels, with yields far above pre-Covid levels. The leisure airlines reported a €92 million net loss in Q1 compared to €-120 million last year, with revenues of €249 million (2021: €37 million) thanks to 2.6 million passengers (2021: 352.000), giving a load factor of 77.7 percent. Transavia grew capacity by 443 percent. Mind you that Covid restrictions heavily impacted the Dutch and French airlines in the first quarter of last year.
Cargo revenues were €910 million or +8.5 percent, but tonnes carried were down by 11.9 percent to 236.000 while the availability of more belly space resulted in 10.7 percent more capacity. The resulting lower load factor (-17.8 percent) pushed unit revenues down by 6.1 percent.
Higher activity and operational improvements benefitted the Maintenance unit, which produced a €43 million profit or €51 million better than last year. Revenues increased by 33.6 percent to 831 million.
KLM repays the first part of state aid
Air France-KLM continued to restructure its balance sheet. The adjusted operating free cash flow improved to €630 million, up from €-1.344 billion last year. This includes the effect of €1.2 billion in advanced ticket sales and other positive changes in its working capital. The Group ended the quarter with €7.7 billion in net debt, down from €8.2 billion in December, and had €10.8 billion available in liquidity.
After Air France already repaid €500 million in French aid in December, KLM has now also started repaying debt. On May 3, it repaid €311 million of its revolving credit facility to the Dutch state. In his final comments as CEO of KLM before leaving the group, Pieter Elbers hoped that the airline will be able to repay more during the remainder of the year. Further measures to strengthen KLM’s equity position are considered this year, but it is unlikely that this includes more state aid. The new Dutch government has taken a more critical stance on KLM and demands that it makes further cost reductions. This comes at a critical moment, as KLM was confronted with a wild strike from ground handlers recently who demand better working conditions at Amsterdam Schiphol and a salary increase. Solving work pressure issues and stabilizing operations will be a key priority for Elbers’ successor Marjan Rintel, who joins the airline in July.
Air France is working on refinancing €500 million of €4.0 billion in assets to redeem French state aid, mainly by using quasi-equity instruments. The Group still plans a capital increase to restore equity and accelerate the repayment of state aid, but Zaat said that this has to be timed carefully. Right now, capital markets are rather nervous about financing the airline industry, so Air France-KLM will wait until the timing is right.
Capacity set to grow to 85-90 percent in Q3
In its outlook for the rest of 2022, Air France-KLM expects to grow network capacity from 75 percent in Q1 to 80-85 percent in Q2, and to 85-90 percent in Q3. Transavia will operate above 100 percent. Long-haul capacity will be 83 percent in Q2 and 86 percent in Q3, medium-haul at 88 and 98 percent respectively, and French domestic at 46 to 61 percent respectively.
The Group has hedged 72 percent of its fuel costs for Q2, seventy percent for Q3, and currently 43 percent for Q4, although it will up this shortly to 55 percent. It already has a €950 million hedge benefit for the full year so far. To compensate for higher prices, the airline has already increased long-haul fares. This and the coming quarters, the carrier plans to purchase eight to nine metric tonnes of sustainable aviation fuels (SAF). On the financial guidance, Air France-KLM expects to get break-even operating margins in Q2 before getting a significant positive result in Q3, with yields above 2019 levels.
On the fleet, Air France phased out three Airbus A318s, two A319s, one A320, two Boeing 777-200, and one Embraer E145 while taking delivery of three A350-900s, two A220-300s, and one E190. KLM took delivery of two Embraer E195-E2s and phased out one E190. The Group confirmed its order for 100 Airbus A320neo’s and A321neo’s plus sixty options. Negotiations with CFM for the LEAP engines are still ongoing.
