The FINANCIAL — The Board of Directors of Air France-KLM, chaired by Alexandre de Juniac, met on 18 February 2015 to approve the accounts for Full Financial Year 2014.
Alexandre de Juniac made the following comments: “The Transform 2015 strategic plan was completed at the end of Full Year 2014, having fully delivered on its objective of an in-depth turnaround in Air France-KLM’s competitiveness. The Full Year 2014 results speak for themselves: despite the challenging economic and competitive context, once corrected for the impact of the Air France pilot strike, EBITDA is up by more than 50% in 3 years, and the operating cash flow3 has more than tripled to reach nearly 1.5 billion euros. This essential step in the turnaround of the Group was only achieved thanks to the full commitment of staff across the Group. With Perform 2020, the new strategic plan launched a few months ago, Air France-KLM is now focusing on the future: while continuing its deep transformation, the Group is investing in products, brands, and growth segments like low-cost and aeronautical maintenance… By deciding today to reinforce its unit cost reduction efforts and adapt its investment plans, the Group is ensuring that it can achieve its key targets of improved competitiveness and deleveraging.”
During the Second Half 2014, activity was affected by a fourteen-day strike by Air France pilots, which had an estimated negative impact of 425 million euros on the operating result (330 million euros in the third quarter and 95 million euros in the fourth quarter). Total revenues were reduced by 495 million euros, partly offset by 70 million euros of net savings on costs. The strike led the Group to cancel 4,249 million ASKs and 213 million ATKs resulting in an equivalent cancellation of 4.75 billion EASKs (Equivalent Available Seat Kilometer), according to KLM.
In addition, in the fourth quarter, the Group recorded several one-off items for a net positive change of 48 million euros versus the fourth quarter of 2013:
The Group recognized an unusually high level of revenues on tickets that have been issued but will never be used. This change of 100 million euros compared to Q4 2013 has been removed from the like-for-like computations.
On the cost side, it recorded 52 million euros of one-off provisions mainly related to the fleet.
On top of these two items, “like-for-like” computations take into account currency effects, which had a significant impact on 2014 results, depressing revenues by 279 million euros, and costs by 121 million euros, for a net negative impact of 158 million euros on the operating result.
Full Year 2014 total revenues stood at 24.9 billion euros versus 25.5 billion euros in 2013, down 2.4%, but stable (+0.3%) like-for-like, according to KLM.
Total operating costs were 1.4% lower year-on-year and 0.8% lower on a like-for-like basis. Ex-fuel, they decreased by 0.4% and by 0.5% on a like-for-like basis. Unit cost per EASK was reduced by 1.3%, on a constant currency, fuel price and pension basis, excluding the strike and Q4 one-offs, against capacity measured in EASK up by +1.2%, corrected for the strike. The fuel bill amounted to 6,629 million euros, down 3.9% and 1.5% like-for-like. Total employee costs including temporary staff were down 1.9% to 7,510 million euros. On a constant scope and pension expense basis and adjusted for the strike, they declined by 119 million euros as a result of the Transform 2015 actions.
EBITDA amounted to 1,589 million euros, a decrease of 266 million euros. Strike-adjusted, EBITDA amounted to 2,014 million euros, up 159 million euros. The strike-adjusted EBITDA margin reached 8.1%, up 0.8 points compared to 2013. On a like-for-like basis, EBITDA improved by 216 million euros.
The operating result stood at -129 million euros versus 130 million euros in 2013, a 259 million euro decrease. Like-for-like, the operating result increased by 275 million euros, corrected for the strike (negative impact of 425 million euros), currency effects (negative impact of 158 million euros) and Q4 one-offs (positive impact of 48 million euros).
The net result, group share stood at -198 million euros against -1,827 million euros a year ago. It included notably the non-current result related to the changes in Dutch fiscal rules on pensions (+824 million euros) and the capital gain on the sale of Amadeus shares (+187 million euros), partly offset by impairments in the cargo activity (-113 million euros), the change in value of the fuel hedging portfolio (-92 million euros, the majority of the fall in value of the hedging portfolio being recorded directly in shareholders’ equity through “other comprehensive income”) and the impact of changes to fiscal rules regarding Dutch pensions on the deferred tax assets (-206 million euros). On an adjusted basis2, the net result, group share stood at -535 million euros against -463 million euros in 2013, a 72 million euro decrease.
Earnings and diluted earnings per share stood at -0.67 euros (-6.17 euros in 2013), and at -1.81 euros on an adjusted basis (-1.56 euros in 2013). The Board of Directors decided not to submit a proposed dividend distribution to the next Annual General Meeting.
The return on capital employed2 (ROCE) was stable at 1.6% compared to 2013. Strike-adjusted, it reached 5.1%, up 2.2 points.
In the Fourth Quarter 2014, total revenues stood at 6.2 billion euros versus 6.1 billion euros in 2013, up 1.5%, but down -0.5% on a like-for-like basis. Unlike in previous quarters, currencies had a positive 98 million euro impact on revenues, primarily due to the strengthening of the dollar against the euro.
EBITDA amounted to 316 million euros, down by 66 million euros. Strike-adjusted, EBITDA amounted to 411 million euros, up 29 million euros. On a like-for-like basis, EBITDA was stable (-6 million euros).
The operating result stood at -169 million euros versus -63 million euros in 2013. Currencies had a 65 million euro negative impact on the operating result in Fourth Quarter 2014, according to KLM.
Full Year 2014 total passenger revenues amounted to 19,570 million euros, down 2.7%. Corrected for the strike, revenues stood at 20,021 million euros, down -0.5% and up 0.3% like-for-like. The operating result of the passenger business stood at -83 million euros, versus 174 million euros over the Full Year 2013. Corrected for the strike, the operating result would have amounted to 289 million euros, an increase of 115 million euros. Like-for-like, the operating result improved by 208 million euros.
The Group maintained its strict capacity discipline, increasing total passenger capacity by only 1.0% excluding the strike impact. Unit revenue per Available Seat Kilometer (RASK) remained volatile, down by 0.6% on a like-for-like basis over the Full Year. In the First Half, RASK was up by +0.5% on a like- for-like basis, but decreased in the Second Half, falling by -1.8% in Q3 and by -1.1% in Q4 on a like- for-like basis.
On the long-haul network, unit revenue was affected by industry overcapacity on certain parts of the network and a weak performance on the Latin American network on the back of a worsening economic situation in several key markets and high comparables in the Second Half. Excluding the strike, the estimated long-haul operating result was down 70 million euros to 730 million euros.
As planned within the framework of Transform 2015, short and medium-haul point-to-point capacity (excluding the Paris and Amsterdam hubs) was further reduced (down 12.8%, excluding strike impact), leading to a significant improvement in unit revenue (estimated at +7.5% like-for-like), whereas for hub-related short and medium-haul traffic, unit revenues remained stable (+0.1% like-for- like). Excluding the strike, the medium-haul estimated operating result was up 180 million euros.
Over the Full Year 2015, the Group will maintain its strict capacity discipline in the passenger business, with planned capacity growth of 1.1% (excluding mechanical rebound in Q3 linked to the strike), including notably stable capacity in the First Quarter of 2015.
As a result of Transform 2015, and despite the low capacity growth, the passenger activity delivered a further decrease in unit cost, with Cost per Available Seat Kilometer (CASK) down by 1.7% like-for- like.
In the Fourth Quarter of 2014, passenger revenues amounted to 4,861 million euros, up 0.3%, but down 1.4% like-for-like. The operating result of the passenger business stood at -171 million euros, versus -59 million euros in the same period last year. Corrected for the strike, the operating result amounted to -84 million euros, down 25 million euros against the same period last year. Like-for-like, it decreased by 19 million euros, according to KLM.
Unit revenue per Available Seat Kilometer (RASK) increased by +0.6% and decreased by 1.1% like- for-like. Unit costs (CASK) were reduced by 0.7% like-for-like.
The Group continued to restructure its cargo activity to address the weak global trade and structural air cargo industry overcapacity. During Full Year 2014, full-freighter capacity was reduced by more than 7%, leading to a strike-adjusted decrease in total capacity of 0.9%. Revenue per Available Ton Kilometer (ATK) was nevertheless down by 0.9% like-for-like, resulting in a further decrease of Full Year revenues, down 2.4% like-for-like.
Thanks to the good performance on unit costs, the operating result improved by 33 million euros like- for-like, but it remains negative (-188 million euros excluding strike impact).
Within the framework of Perform 2020, the Group is accelerating the phase out of 9 full-freighters and plans to operate only 5 full-freighters by the end of 2016. This reduction should enable the full-freighter business to return to operating breakeven in 2017 (versus a loss of 101 million euros in 2014).
In the Fourth Quarter of 2014, cargo revenues amounted to 714 million euros, down 1.2% but stable excluding the strike, helped by the strengthening of the dollar against the euro. On a like-for-like basis, revenue were down by 2.8%. Unit revenue per Available Ton Kilometer (RATK) decreased by 1.2% on a like-for-like basis, according to KLM.
The Group continued its efforts to reduce unit costs, down 2.7% on a like-for-like basis. The operating result improved by 10 million euros like-for-like.
Full Year 2014 third party maintenance revenues amounted to 1,251 million euros, up 2.1% and by 3.5% like-for-like. The Air France pilot strike had a 22 million euro negative impact on the operating result due to lower internal revenues from the maintenance of the Air France fleet. Corrected for this impact, the operating result would have reached 196 million euros, up 37 million euros year-on-year, and up 42 million euros like-for-like.
Over the period, the Group recorded a 28% increase in its order book to 5.6 billion euros, including a major contract with Air China covering the maintenance of GE90 engines.
In the Fourth Quarter of 2014, third party maintenance revenues were 356 million euros, up 19.5% on the back of the strengthening of the dollar relative to the euro and dynamic activity in engine maintenance. The operating result increased by 13 million euros to 61 million euros.
In the Full Year 2014, as planned within the Transform 2015 framework, Transavia capacity was up by 8.3%, reflecting the accelerated development in France ( capacity up by 21%, with an average load factor above 87%) and the ongoing repositioning in the Netherlands (with scheduled capacity up 11.8% and charter capacity down 4.3%). Traffic rose 8.0% and passengers almost reached 10 million. The load factor remained high (89.8%, down 0.2 point) despite the strong increase in capacity.
Total revenues stood at 1,056 million euros, up 7.3%. Unit revenue per ASK decreased by 0.7% while unit cost per ASK was stable (+0.3%). The operating result was -36 million euros, down by 13 million euros, reflecting the rapid ramp up in France, according to KLM.
In December 2014, Air France and its pilots’ unions signed an agreement relating to the development of Transavia in France. This agreement ensures the entirety of the Transavia development plan in France over the next five years:
Continued strong growth in Summer 2015: 21 aircraft in operation versus 16 in Summer 2014, Transavia to become the number one low cost carrier at Paris-Orly by Summer 2015.
37 Boeing 737s in operation by 2019, potentially operating flights from all French airports excluding the Paris-CDG hub, including on destinations already served by Air France.
Transavia will maintain its own operating and remuneration conditions, which are key to achieving its unit cost and operating flexibility objectives.
The development of Transavia will further accelerate in 2015: capacity up 30% in France, operation of a network of 44 destinations from Paris, new brand identity, new web site, order for 20 Boeing 737s, closer ties with Flying Blue, etc.
In the Fourth Quarter of 2014, Transavia capacity was up 13.9%. Traffic rose 14.7% resulting in a load factor increase of 0.6 point to 87.9%. Unit revenue per ASK was up 0.7%. Transavia’s total revenue stood at 193 million euros, up 12.9%. The operating result was -34 million euros, up 1 million euros year-on-year.
In Full Year 2014, third party catering revenues amounted to 311 million euros, down 8.8%. At constant scope (excluding the impact of the sale of Air Chef occurring in Q2 2013), third party revenues increased by 5.9%, reflecting the signature of new contracts and the launch of new operations, including in Brazil. The operating result stood at 18 million euros, up 20.8% at constant scope and corrected for the impact of the Air France pilot strike on internal revenues. Catering increased its profitability while continuing to reduce costs for its internal customers.
In the Fourth Quarter of 2014, third party catering revenues amounted to 77 million euros, up 2.7%. The operating result was up 20%.
In Full Year 2014, the fall of 266 million euros in EBITDA, primarily due to the Air France pilot strike, translated into a 272 million euro reduction in cash flow before change in WCR and cash out related to Voluntary Departure Plans.
The Group disbursed 154 million euros for Voluntary Departure Plans. The change in Working Capital Requirement contributed 113 million euros to operating cash flow. Net investments before sale & lease-back transactions stood at 1,360 million euros, up 296 million euros against the low level achieved in 2013.
As a result, operating free cash flow amounted to minus 164 million euros, versus a positive 530 million euros a year earlier. Strike-adjusted, operating free cash flow would have been positive by 261 million euros.
Operating free cash flow does not include free cash flow from financial investments, including the cash-in of 339 million euros from the sale of Amadeus shares in September.
Net debt amounted to 5.41 billion euros at 31 December 2014, versus 5.35 billion euros at 31 December 2013. The 12 months trailing net debt / EBITDA ratio stood at 3.4x at 31 December 2014 compared to 2.9x at 31st December 2013. Corrected for the strike impact on EBITDA, it would have fallen to 2.7x, according to KLM.
Despite the returns on the pension plan assets and the positive impact of the changes in Dutch fiscal rules on pensions, the 130 basis point fall in discount rate led to a significant increase in the actuarial valuation of the retirement obligations. The balance sheet pension situation thus moved from a net asset of 601 million euros at 31 December 2013 to a net liability of 710 million euros. Combined with the lower value of the fuel hedging portfolio, this evolution led to shareholder’s equity becoming a negative 671 million euros at 31 December 2014. This accounting situation has no consequence on Group operations and liabilities.
The Group continues to enjoy a good level of liquidity, with net cash2 of 3.5 billion euros at 31 December 2014, and undrawn credit lines of 1.77 billion euros. This compares with short term debt of 1.8 billion euros. In January 2015, the Group received net proceeds of 327 million euros on the sale of Amadeus shares.
Outlook
After three years of implementation, Transform 2015 has reached its cost reduction target, with ex-fuel unit cost down 7% compared to 2011. Nevertheless, the momentum in net debt reduction was slowed by the Air France pilot strike and the weaker unit revenues observed since Summer 2014.
The Group is currently deploying all the operational initiatives planned within the framework of the new strategic plan Perform 2020:
The development of the passenger hub business based on an upgraded product offer, an increased customer focus, a stronger positioning of brands, and the reinforcement of strategic partnerships.
The further optimization of its point-to-point operations, with the creation of a single business unit, aiming at a return to operating breakeven by 2017.
A new step in the accelerated development of Air France-KLM in the European leisure market, under the Transavia brand, growing by 30% on the French market in 2015 and carrying more than 16 million passengers by 2017, according to KLM.
The finalisation of the cargo repositioning
The development of the maintenance business
In parallel, a structured approach to achieving unit cost reduction is being deployed across all entities of the Group. Negotiations with KLM unions are ongoing, and will start in the second quarter of 2015 with Air France unions.
The global context in early 2015 remains uncertain, with a significant drop in fuel prices, the continuation of the overcapacity situation on several long-haul markets, and a negative currency impact on results. In consequence, the Group believes that almost all of the expected savings on the fuel bill4 could be offset by unit revenue pressure and negative currency impacts.
Under these conditions, the Group has decided to reinforce the measures planned within the framework of Perform 2020:
2015-16 investment plan scaled back by 600 million euros: 300 million euros in 2015 and 300 million euros in 2016
Immediate implementation of further measures at Air France including new Voluntary Departure Plans targeting 800 Full-Time Equivalents
2015-17 unit cost reduction target revised up from “between 1% and 1.5% per year” announced in September 2014 to “an average of 1.5% per year”
For Full Year 2015, the Group targets a unit cost reduction of 1% to 1.3%, equivalent to 250 to 350 million euros of savings, and net debt around 5 billion euros at the end of 2015, taking into account the financial impact of the pilot strike.
The Group is updating its medium-term (2017) financial targets to take into account the significant fall in fuel prices, the increased volatility of currencies and unit revenues, and the impact of the pilot strike:
The target on debt ratio becomes: an adjusted net debt2/EBITDAR ratio of around 2.5 in 2017
The group maintains its free cash-flow target: base businesses to consistently generate annual positive free cash flow
The medium-term 8 to 10% EBITDAR growth target issued in September 2014 was based on a constant fuel price but not constant unit revenues. The current context of a significant fall in fuel prices accompanied by a fall in unit revenue is making the achievement of this target challenging. In consequence, the Group will focus for now on its reinforced average 1.5% annual unit cost reduction efforts.
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