Air France-KLM looks back on a strong second quarter, with double-digit growth in revenues and a profit margin reaching ten percent again. Air France fared better than KLM, while leisure subsidiaries Transavia produced an HY1 net loss due to serious capacity and operational constraints. Air France-KLM happy with strong Q2 despite headwinds.
The Franco-Dutch airline group posted a €612 million net profit in Q2 compared to €325 million in the same period of last year. In Q1, the airline posted a €-344 million net loss. Revenues were up fourteen percent to €7.624 billion from €6.707 billion. Operating expenses totaled €6.296 billion, up €520 million year on year.
Salary costs were up eighteen percent to €2.156 billion, the result of new collective labor agreements that were concluded in Q4 last year. Unit costs were up by 5.6 percent, caused by inflation, higher airport charges at Amsterdam Schiphol, and salary costs. Unit costs should come down to a single-digit increase by Q4.
Fuel was cheaper by eleven percent at €1.662 billion. EBITDA was €1.328 billion versus €931 million. The operating profit was €773 million versus €415 million. The group ended the quarter with an operating margin of 9.6 percent. Adjusted free cash flow was €557 million, which is down €975 million on Q2 last year when a catch-up effect was evident.
Yields were up on average by nine percent, but reached 11.1 percent on long haul versus 9.7 percent on short- and medium-haul. Premium yields continue to be strong at on average 10.9 percent year on year, notably to the Caribbean and Indian Ocean (21.8 percent) and to a lesser extent on routes to North America.
In HY1, Air France-KLM produced a €275 million net profit, up from a €-226 million net loss in 2022. Revenues grew to €13.953 billion from €11.152 billion, expenses to €12.339 billion from €10 billion. The operating profit was €469 million versus €60 million last year. EBITDA was €1.614 billion, up from €1.152 billion. CFO Steven Zaat was very pleased with the Q2 results, which outperform those of 2019.
Air France outperforms KLM
Looking a bit more at Q2, unit revenues for the network carriers Air France and KLM were up 13.1 percent on an 8.1 percent higher capacity. The airlines carried 18.7 million passengers, up from 17.6 million in 2022. Together, they produced €5.913 billion in revenues and reached an operating margin of even 10.6 percent.
But there are differences between the two network carriers. Air France came out with a €482 million operating profit compared to €133 million in Q2 last year, with revenues of €4.667 billion versus €4.062 billion. The operating margin improved from 3.3 to 10.3 percent year on year. These results reflect a strong performance in long-haul travel and associated higher load factors, which boosted revenues.
For HY1, Air France reports a €301 million operating profit (2022: €-230 million) on revenues of €8.591 billion (€6.743 billion) and an operating margin of 3.5 percent versus -3.4 percent.
KLM reports an operating profit for Q2 of €257 million compared to €262 million, although revenues were higher to €3.111 billion from €2.782 billion. The operating margin was 8.3 percent versus 9.4 percent, so KLM’s is worse than that of Air France. These results reflect the supply chain, labor shortages, and fleet issues at KLM Cityhopper (Embraer E2 engine-related groundings) and Transavia. To the satisfaction of CEO Ben Smith, operations at Amsterdam Schiphol have much stabilized this year compared to the chaos of last year when a capacity cap was introduced.
“Demand was higher than the number of flights we could operate. The main reason is that aircraft are spending longer in the hangar for maintenance due to worldwide issues affecting component supply. Moreover, we have not completely fulfilled our staffing requirements at various departments yet. KLM was also faced with higher fuel, labor, and material costs, as well as higher airport fees. This illustrates the importance of structural cost management,” said KLM CEO Marjan Rintel.
For HY1, KLM reported an operating profit of €129 million compared to €266 million last year, but the airline notes that, back then, it still received €138 million in payroll support (NOW) last year. Revenues increased to €5.632 billion from €4.685 billion.
The operating margin for HY1 was just 2.3 percent, down from 5.7 percent last year. Zaat said that KLM is performing still fourteen percent below 2019 levels, so there is much room for improvement.
The carrier will have to take a close look at costs and margins and seems to have taken first steps by offering more sober terms for a new collective labor agreement. Stay tuned for some heated negotiations with unions…
Transavia
Denting the results in both Q2 and HY1 are Transavia and Transavia France. The Dutch leisure subsidiary hit serious capacity issues due to aircraft shortages as scheduled maintenance took longer than planned and five aircraft leased from Air Lease Corporation took longer to be inducted. As a result, the carrier was forced to cancel hundreds of flights from April. This continues until the end of August, as Transavia has build in more resilience through more spare aircraft capacity now that they have become available.
Transavia France was hit by the effects of the numerous ATC strikes in France (sixty days this year, says Ryanair), mainly at its Paris Orly hub.
As a result, the two carriers contributed €0 to the Q2 results compared to €-18 million last year, but at least they were break even. Revenues were €712 million (€601 million) from 5.9 million passengers carried, up from 5.2 million. Unit revenues were still up 8.8 percent.
For HY1, the two Transavias report a €-172 million operating loss versus €-110 million in 2022. Revenues were €1.089 billion, up from €850 million. Transavia is still expanding its network, with capacity up twenty percent over 2019 in Q2.
Ben Smith said that “from a controllable growth and stabilization perspective, I am quite pleased with what happened in Q2 and going into Q3 at how Transavia France is developing. Bookings, yields, and the robustness of operations is exceeding what we had hoped. The transition from domestic to European slots is a little bit later than planned, but we are still sticking to the overall strategy. (…) After a difficult Q2, we now see things getting back to normal at Transavia Netherlands, taking full advantage of the strong demand environment in the Mediterranean base.”
Air France-KLM and Martinair Cargo produced €633 million in operating revenues, down from €918 million in Q2 last year. At 213K tonnes carried, this was ten percent down year on year. This reflects the slower demand for air cargo caused by a slump in the global economy and a drop in sea freight fares. At the same time, capacity grew by 6.5 percent as more belly capacity was coming in. Unit revenues were down 42.1 percent. HY1 cargo earnings were €1.063 billion, down from €1.597 billion in 2022.
Supply chain issues with General Electric at Air France and labor shortages at KLM hurt the maintenance activities, making it impossible to accommodate all planned shop visits. Revenues of the business unit were up 11.3 percent to €384 million and produced a €46 million operating result.
Loyalty program
Having shed off all state-backed loans, Air France-KLM continues to rebuild the balance sheet and improve its equity position. The group announced on Thursday that it intends to monetize its Flyingblue loyalty program and entered exclusive negotiations with Apollo Global Management for a €1.5 billion deal. Financing will be done through a non-dilutive, quasi-equity instrument (perpetual bonds) also used for two earlier transactions with Apollo in July last year for engines and spare parts and maintenance components this July. These transactions generated a combined €1.0 billion.
Although a new ‘Miles Bank’ company will be established, Steven Zaat stressed that the proposed transaction will have no consequences for Flyingblue customers and is identical to transactions done by other airlines in the US and Europe. “Nothing will change for the members or our staff. We don’t sell any assets and don’t change any ownership construction. It is an internal reorganization to create quasi-equity. We put a hybrid bond in place to solve our negative equity situation in our group”.
Net debt of Air France-KLM stood at €4.9 billion by the end of June, down from €6.3 billion in December. Cash stood at €10 billion. Medium-term, the group targets an operating margin of seven to eight percent.
Capacity increase in Q3
Air France-KLM expects to full-year capacity of 95 percent. The guidance for the network carriers is down from 95 to 90 percent, which Smith and Zaat attribute to supply chain and aircraft availability issues.
Capacity was at 92 percent in Q2, will reach 95 in Q3, and should surpass this target in Q4. Short-haul was still behind in Q2 but will catch up and equal long-haul at ninety percent in Q3. For Q4, long-haul will outperform short-haul again at 95 versus 90 percent. Transavia was at 120 percent in Q2 and will grow to over 135 percent capacity in Q4. The Group plans to return to 100 percent capacity versus 2019 next year.
Bookings for Q3 continue to be strong and are even above 2022 levels for Q4. “We don’t see any weakening in booking at all. Even Transavia is doing better than last year. I look every week at the booking reports and sometimes ask if they didn’t send the version of last week, but this isn’t the case. If you look at the first three weeks of July, I can tell you it is amazing.”
