In spite of growing its passenger revenues nearly 7%, Air France-KLM Group saw its 2Q2012 net loss widen year-over-year as a result of provisions for restructuring and a drop in the value of fuel hedging contracts. The Franco-Dutch group recorded a deficit of EUR895 million for the three months ending 30-Jun-2012, more than quadruple of the EUR197 million net loss accrued in the year-ago period.
Air France-KLM took a special charge of EUR368 million related to its Transform 2015 restructuring programme, principally to fund a voluntary redundancy plan announced at Air France in Jun-2012. It also took a EUR372 million accounting charge related to the hedging of fuel prices. Excluding these non-cash items the Group’s net loss for 2Q2012 would be “by no means abnormal”, Air France-KLM Group CFO Philippe Calavia noted during a discussion of the company's results.
On operating level, Air France-KLM reduced its loss year-over-year by 55% to EUR66 million in 2Q2012 comprising a markedly improved performance of its passenger activity and a worsening performance of the cargo division. Operating losses of the passenger business fell to EUR47 million in 2Q2012 from a EUR140 million loss in the year-ago period. Maintenance remains the Group’s most profitable unit in spite of generating the least revenue.
Air France-KLM Group financial highlights by business unit: 2Q2012 vs 2Q2011
For the first half of FY2012, Air France-KLM recorded a deepening of its net loss to EUR1.3 billion from EUR564 million in the year-ago period, whereas operating loss reduced year-over-year by 22% to EUR663 million. Revenue in 1H2012 increased 5.2% to EUR12.1 billion
Air France-KLM Group chairman and CEO Jean-Cyril Spinetta said the results “demonstrate how crucial the success of the Transform 2015 plan is to the turnaround of the group. In an increasingly uncertain global economic environment compounded by oil price and exchange rate volatility, an improvement in our productivity and costs is even more necessary”.
The company’s total consolidated revenues advanced 4.5% year-over-year during 2Q2012 to EUR6.5 billion driven by a 6.8% rise in passenger revenues to EUR5.1 billion. Company CFO Philippe Calavia said Air France-KLM’s passenger activity delivered a “good performance” in light of the mediocre economic environment. Passenger revenue growth was driven by a strong increase in unit revenue and an improvement in load factor as passenger traffic outstripped the increase in capacity. The Group limited capacity growth in 2Q2012 to 0.3% year-over-year while RPKs rose 2.4% to 55.8 billion, consequently seat factor gained 1.7 ppts to reach 83% on average across its network.
Unit revenue per ASK rose 6.1% to EUR 7.27cents underpinned by volumes and a positive currency effect of 2.5% while unit revenue per RPK increased 4% to EUR 8.78 cents. Excluding the currency effect, Air France-KLM's RASK increased 3.6 ppts and yield inched up 1.4%.
Air France-KLM Group year-over-year unit revenue growth: 2Q2012
Unit revenue performance in 2Q2012 was very diverse across its network and comprised a 3% decrease in RASK excluding currency effects on medium-haul routes and a 6.4% increase in long-haul sectors. Unit revenue in economy class on long-haul routes rose a solid 6% and 9.5% in premium. Three regions within the Group’s long-haul network drove the unit revenue growth – the North Atlantic, Middle East/Africa and Asia. Mr Calavia noted that the unit revenue growth in Asia and Middle East/Africa was mainly a “recovery” growth related to the Mar-2011 earthquake and tsunami that struck Japan and the social and political unrest in certain countries in the Middle East and Africa in the year-ago quarter. The 10% unit revenue growth recorded in 2Q2012 on North Atlantic routes was the result of the strict capacity discipline of all three alliances (oneworld, SkyTeam and Star) operating on these routes, Mr Calavia asserted. Air France-KLM reduced ASKs on its North Atlantic network by roughly 8% year-over-year in 2Q2012.
Air France-KLM Group year-over-year passenger unit revenue growth per region: 2Q2012
France emerged as the Group’s worst performing regional entity during 2Q2012, with unit revenues in the country falling by almost 8% and yield dropping 2%. Mr Calavia said that the weak RASK performance on the Group’s domestic and European routes was due to weak economies in the region and the launch of three new bases by Air France at Marseille, Nice and Toulouse airports. The launch of the new operating bases was accompanied by strong promotional activities which negatively affected the traffic mix.
The increase of LCC competition also had a negative effect on the Group’s unit revenue performance on medium-haul routes. easyJet, which is France’s second largest airline in terms of passenger numbers, opened two new bases in the country in Mar-2012 at Nice and Toulouse.
See related article: Air France rapidly grows Marseille base but with swift network changes along the way
Air France-KLM’s consolidated operating expenses during 2Q212 increased 3.6% to EUR6.6 billion, growing at a slower pace than its total revenue. Total operating cost excluding fuel declined by 0.3%. Unit cost per EASK (equivalent available seat kilometer is the Group’s preferred measure and includes passenger and cargo capacity) rose 3.5%, but declined 1.3% on a constant currency and fuel price basis on a stable production per EASK.
The group’s main changes in operating costs in 2Q2012 related to fuel expense, which rose by almost 13%. Distribution and other costs fell sharply by 6% and 6.6% respectively. Air France-KLM's fuel costs increased by EUR214 million under the combined effects of a 2% decline in volume, a negative euro/dollar exchange rate effect of 10% and a rise in the price after hedging of 5%. Air France-KLM employee costs rose 1.9% to EUR1.97 billion in 2Q2012 in spite of a 2% year-on-year reduction in head count. The company's employee expenses in 1Q2012 rose 6% on the year-ago period.
Mr Calavia stated that the “favorable” trend in operating costs is due to the gradual implementation of the company’s Transform 2015 restructuring plan.
Air France-KLM Group year-over-year change in operating costs: 2Q2012
Air France-KLM in Jan-2012 launched Transform 15, a long-overdue turnaround programme aimed at restoring profitability and competitiveness through a 10% reduction in unit costs (excluding fuel), restructuring the medium-haul operations and reducing net debt by EUR2 billion by the end of 2014. According to a road show presentation in May-2012 the Group aims to achieve a unit cost of EUR 4.4 cents per EASK.
The three-year (2012-2014) restructuring programme comprises a first phase of immediate measures to stop burning cash and a second phase designed at establishing more in-depth structural changes to transform the business and create EUR1 billion in productivity improvements. Measures included in the first phase are a reduction in planned capacity growth (expressed in ASKs), a diminution of investment and EUR1 billion in short-term cost savings achieved through payroll measures and productivity and network adaptation.
During the presentation of the 2QQ2012 results, Mr Spinetta revealed the Group recently had revised the capacity reductions and Capex from the Mar-2012 forecast. Based on information released on 30-Jul-2012, Air France-KLM will cut capacity growth from 4.7% in 2011 to an increase of approximately 1% annually during the next three years. The company initially planned to limit ASK growth to 2.2% in 2012 and 2013.
Air France-KLM planned capacity growth reduction: 2011 to 2014
Air France-KLM has also revised its Capex projections that include a “sharp reduction” in aircraft investments, but Mr Spinetta reiterated the company will step up product investments as part of its “customer at the heart” projects. This includes the “upscale” repositioning of its business offering on medium-haul routes to “become the best in class for business class in Europe”, Mr Spinetta said.
Also Air France’s premium long-haul product will be enhanced to the “highest industry standards” as it wants to regain market share it is losing to Gulf carriers. Air France is in talks with Etihad about a codeshare agreement, but management declined to give an update on the negotiations during the 2Q2012 results presentation. Abu Dhabi's Etihad has stated the talks do not include a JV shareholding.
Air France-KLM investment reduction: 2011 to 2014
Air France-KLM is adamant that Transform 2015 will be fully implemented. “What is clear is that we don't have a choice: the measures we proposed are meant to ensure the survival of the company and its recovery in coming years”, Mr Calavia said.
Both the French and the Dutch units will have to pull their weight and the restructuring is a coordinated effort, Mr Spinetta noted. However, KLM has a 15% improvement in economic efficiency in 2014 and Air France a 20% improvement. KLM is the smaller but more productive unit of the group while Air France’s medium-haul operations accrue most of the losses. Company management has failed to address overstaffing and low productivity to keep social peace. But things might be finally changing at the French group. Air France chairman and CEO Alexandre de Juniac recently stated that there is “no Plan B” for the company’s turnaround plan, and that the objectives of Transform 2015 will be achieved as foreseen.
Air France wants to reduce head count by 5260 full-time equivalents (FTEs) by the end of 2013, comprised of 3029 ground staff, 550 cockpit crew and 1681 cabin crew. The airline has committed to rule out compulsory job cuts in exchange for a 20% improvement in productivity in all three labour categories. Unions representing ground staff have accepted the voluntary departure of 2767 employees as well as a new collective labour agreement as of 01-Jan-2013. Also the SNPL, the union representing about 70% of Air France pilots, has accepted the terms of a new collective labour agreement and has submitted it for a vote with a favorable recommendation from its board. The results should be known in mid-Aug-2012.
Two of Air France's main cabin crew unions oppose the proposals and Mr de Juniac has pledged that the current collective labour agreement which ends 31-Mar-2013 will be replaced by a new agreement with less favourable terms and conditions. Proposals for the new collective labour agreement that was rejected by the majority of cabin crew include an increase of hours flown to 620 hours p/a on medium-haul (up from 535 hours) and to 720 hours on long-haul (up from 680 hours), a reduction of number of pursers on certain long-haul flights and a reduction in travel costs.
A bonus for pilots transferring to Transavia
The new collective labour agreement for cockpit crew calls for a reduction of seniority creep by 0.6% p/a and an increase in time worked to 700 hours (+65 hours) on medium-haul and to 740 hours (+30 hours) long-haul. A new Fatigue Risk Management System will be implemented to review crew composition and rest regulations during stop-overs and there will be a reduction of travel leave.
Air France pilots have also been offered to transfer to Transavia.com France, the Group’s French low-cost subsidiary that operates mainly from Paris Orly to leisure destinations in the Mediterranean. The LCC/charter carrier has been earmarked for growth under Transform 2015.
See related article: Transavia France is spreading its wings to regional airports in its home market
To incentivise the mobility of Air France pilots to Transavia France, and accept higher productivity and lower pay, Air France is offering a “bonus” of five to six months’ salary. This represents between EUR30,000 and EUR60,000 per pilot. The transfer to Transavia would be temporary and be only for three years.
Air France-KLM has made some decent progress on implementing its turnaround plan.The company recorded a nice reduction in operating losess during the first half of FY2012, and the Group expects to vacate negative territory and generate an operating result above the EUR195 million it realis ed in 2H2011. However, it is too early to declare victory and long-term sustainability is not yet in Air France-KLM's sights. But the company's debt remained uncomfortably high at EUR6.2 billion at 30-Jun-2012 and a net debt/ EBITDA ratio of 5. The uncertain outlook for the global economic environment together with the volatility of fuel prices might halt Air France-KLM's recovery, and some unions are likely to call strikes as they oppose change and ignore economic realities.
See related article: Spiralling fuel costs trigger higher 1Q2012 loss at Air France-KLM