Fuel Price Increases Negate Cost Cutting for Air France-KLM During 2012


Air France-KLM AF reported a loss for the full year 2012 as a higher fuel bill outweighed strong costcontrol efforts initiated as part of its Transformation 2015 plan, and we are making no changes to our fair value estimate. Air France-KLM’s performance for 2012 was helped by strong load factor and yields in the passenger segment, offset by continued weakness in cargo.

Total revenue of EUR 25.6 billion was 5% higher than last year. Operating loss totaled EUR 300 million as its total fuel bill increased by nearly EUR 1 billion from 2011. Excluding fuel, operating expenses were up by only EUR 300 million, which is quite impressive and validates the company’s strategy of cost cutting and right-sizing the business.

The Transformation 2015 program limits capacity addition thus reducing capital expenditures, adds labor agreements to help contain (or perhaps even eliminate) personnel costs, and allows the company to generate the needed cash flow to reduce net debt by EUR 2 billion by year-end 2014. At year-end 2012, net debt of EUR 6 billion consisted of EUR 11 billion of gross debt and EUR 5 billion of cash and short term financial assets.

This was an improvement of EUR 500 million from year-end 2011, 25% of the way to reaching its goal by the completion of 2014. Air France-KLM did a good job of controlling costs in 2012, and we believe it must maintain the discipline in order to become a more healthy enterprise. The company has completed most union agreements that will help manage its highest cost item, labor.

It is now dealing with other areas, including reducing cargo capacity, reorganizing activity in France with a new brand (Hop!), and reducing fleet across the enterprise. These are necessary steps, but many have been tried with little success, and we are skeptical of a robust outcome at this time. Nonetheless, Air France-KLM has identified many issues that will improve


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