Air France-KLM bullish on future as it continues to transform |

It has been a few difficult years, with its future on a lifeline of state-backed credit facilities and loans, but Air France-KLM is now clearly looking to the future in great confidence. The Franco-Dutch airline group has raised its medium-term outlook, expecting to improve the operating result by €2.0 billion over the next five years and produce an operating margin above 8 percent between 2026 and 2028. Group CEO Benjamin Smith, Chief Financial Officer Steven Zaat, and the rest of the management team expressed optimism and confidence during Thursday’s Investor Day in Paris. Smith explained that Air France-KLM has reaped the fruits from the transformation program that was launched before the pandemic in 2019, but accelerated during the Covid crisis. It continues and there is more work to do, but the airline group is in a much better shape than pre-Covid, with solid foundations laid out for sustainable growth built on sustainability targets. Key steps taken in past years have been structural cost savings of €3.0 billion, the reduction of net debt by repaying credit facilities and Covid-related aid taken on during the pandemic years, restoring the balance sheet and equity, and stabilizing the troubled relations with the unions. Other priorities were the simplification of the operating model (out went Joon and HOP…) and of the fleet. Air France will go from eleven to five or six aircraft types (out went the Airbus A380s…), KLM from six to five types as new-generation, while more sustainable aircraft will come in. Finally, the group attracted new investors with Apollo Global Management and CMA CGM. “I am happy to say that we delivered on the promises and commitments we set out,” said Smith. Key priorities With the house almost back on order, Air France-KLM wants to build on this. It has set out several key priorities for the medium-term strategy to 2028 to strengthen its competitive position. In the next five years, each of the two network airlines should improve EBIT by €700 million, Transavia by €400 million, and Maintenance & Engineering by €200 million. This should come from €450 million in lower unit costs, €430 million from fleet renewal efficiencies, €450 million from business and operational optimizations, €430 million from the Flying Blue loyalty program, and €230 million from organic growth. A new fuel hedging policy will extend hedging for two more quarters to six in total at 70 percent to prepare the airline for price fluctuations. The group is including a 20 percent increase in productivity, especially with ground staff. CFO Steven Zaat said that the group expects an average of 4 to 5 percent capacity growth per year, with Air France and KLM at 4 percent and Transavia at 6 percent. Capital expenditures, mostly for the fleet, will total €3.0 to €3.5 billion between 2024 and 2026 and €3.5 to €3.8 billion in 2027 and 2028. To optimize the balance sheet, it is most helpful that Air France-KLM has now two improved credit ratings with Fitch and S&P, which allow the group to secure financing at more favorable conditions at lower interest rates. Gross debt will come down from €8.5 billion in 2024 to €5.8 billion in 2026. All airlines within the group want to grow their market position, which should automatically translate into higher revenues. Air France has already gained a three-percent growth of direct traffic at Charles de Gaulle to 52 percent this year, but 54-55 percent in the target for the next years. Feeder traffic at CdG also remains essential. This must be done while keeping a strict eye on costs and identifying options for further savings, in part by simplifying the business. Smith admitted that KLM’s position at Amsterdam Schiphol is under pressure, given the plans of the government to reduce capacity. If KLM would lose slots, gauging up the fleet is the answer. This will give KLM the flexibility to respond to the potential reductions. Smith stressed that there is no intention to give up any of the long-haul slots out of Amsterdam. Air France-KLM is way off the synergies that International Airlines Group (IAG) is getting, said Smith, so there remain many opportunities to improve. Air France CEO Anne Rigail said that 50 percent of the transformation program at her airline is done, but further improvements through more simplification, revenues, costs, and strategy will continue. CEO Marjan Rintel added that reducing staff shortages and absenteeism in operations and maintenance is key at KLM. Increasing fleet utilization is also essential through better planning and reducing operational costs. KLM will also review its core and non-core activities. Product and fleet renewal Air France and KLM aim for higher customer satisfaction thanks to better service and better products, both onboard the fleet and on the ground. The roll-out of new cabins will continue, including the new La Premiere First Class of Air France set to enter service in 2025, and the new Business and Premium Economy. They will come as retrofit and with the introduction of each new aircraft. Paris CdG will see more automated border control to improve customer experience at the airport. Air France wants to leverage its brand and make it more attractive with the new products. KLM wants to enhance customer experience by investing more in new digital products, in addition to introducing new premium products on the long-haul fleet and rolling out Wi-Fi. However, the focus will be on operational stability to prevent the problems of 2022, which were partly to blame on the airline but mostly on Schiphol Airport. Both network airlines have announced renewal plans for their long-haul fleets earlier this year with an order for up to 90 Airbus A350-900s and -1000s aircraft with purchase rights for another 40. KLM will start replacing the Boeing 737-fleet with Airbus A320neo family aircraft from next year as part of an order for 100 neo’s for both KLM and the two Transavia’s. Air France is in the process of taking more A220 deliveries. Part of the revenue growth must come from the Flying Blue loyalty program, offering a better value proposition to customers and adding more non-airline partners to the program. Already, 40 airline partners are connected to Flying Blue, which has 22 million members, of which 72 percent are in France and The Netherlands. The target is 8 percent growth per year until 2028 and growth of the share of non-airline partners to 60 percent. The program was recently sold to Apollo Global Management for €1.5 billion through quasi-equity financing, but this will not have any consequences for its members. Executive Vice President of Strategy Angus Clarke stressed the importance of alliances with partner airlines beyond the one with Delta Air Lines. The strategic partnership with Etihad is the newest one, with codeshare and interline to be grown gradually over time. While Air France-KLM is number 2 on the transatlantic, the joint venture with various airlines has seen a solid seven-percent growth. Transavia’s growth Transavia and Transavia France, referred to by Smith as hybrid leisure and corporate airlines, will have to improve their unit costs and margins. Dutch Transavia wants to position itself as the number 1 LCC on the Dutch market, which will not be easy given the strong competition from easyJet and Ryanair at Schiphol plus Wizz Air at Eindhoven Airport. The airline looks at other growth opportunities in the small Dutch home market. Without mentioning, Smith referred to the new Lelystad Airport that has not been opened due to political resistance. Transavia France is keen to improve its financial results and wants to be the preferred airline in France and grow its position at Paris Orly, where it will take over slots from Air France in 2026 as the parent airline restructures its French domestic network and transfers flights to the international network out of CdG. Transavia currently has a 32 percent share at Orly, double that of 2019, but will inherit the 18 percent share that Air France had this year and grow from there. The fleet will grow to 75 at Orly to solidify its position. Transavia also wants to grow its footprint in secondary cities in France. Both Transavia’s are also on the verge of fleet renewal, with the Dutch carrier taking delivery of its first Airbus A321neo next Tuesday and Transavia France of the first A320neo in January. The Airbus fleet should offer opportunities for further cost reductions that will help to improve margins. Smith said that there are some delays in the Airbus deliveries, “but not too bad.” Air France KLM Maintenance & Engineering wants to consolidate its market position, expecting to benefit from the average 3-percent growth per year of the MRO market until 2033. The business unit should benefit from the CFM LEAP, which is set to be the leading engine in the MRO market, ahead of the General Electric GEnx, the Pratt & Whitney PW1500G for the Airbus A220 fleet, and the Rolls-Royce XWB for the A350 fleet. The airline group reiterates its sustainability targets for 2030, intending to take up at least 10 percent of sustainable aviation fuels (SAF). Already one-third of the uptake has been contracted with various fuel suppliers. Confidence again Ben Smith and Steven Zaat pointed out that Air France-KLM is a very different and much healthier airline compared to 2019. Zaat confirmed that the group will meet a 7 to 8 percent operating margin for 2024 to 2026 and should get above 8 percent in 2028. Free cash flow from operating activities will be positive in the coming three years before becoming significantly positive in 2028. Transformation initiatives – and there are 700 within the group – will bring €4.4 billion in structural benefits in 2026. But it will require disciplined capital allocation. “Any investment has to make sure that it will not weigh us down,” Ben Smith stated.

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