Air France-KLM’s attempts at recovery hit by strikes

Air France-KLM

The strike that hit Air France-KLM last week has been described as “regrettable and aggressive”, by the airline’s chief executive Jean-Marc Janaillac. Janaillac blamed crew members only a couple of days after the French group had reported an encouraging trading update for the quarter ended 30 June.

“At 30 June 2016, the trailing 12 month return on capital employed (ROCE) was 11.7%, up 6.3 points compared to 30 June 2015,” AF-KLM pointed out last week. Other financial metrics were similarly appealing.

However, as strikes may well continue to weigh on performance, AF-KLM reportedly had to cancel 139 long- and medium-haul flights on Friday alone from its domestic hub.

As such, investors and market observers might want to pay even more attention than in the past to its debt pile and cash flows, given that according to several press reports, some 150,000 passengers were affected in recent days.

While cash balances remain under the spotlight, the group said that net debt “amounted to €4bn at 30 June 2016, versus €4.3bn at 31 December 2015, an improvement of €265m. Currencies had a significant negative impact of €142m on net debt.”

However, first-quarter net debt stood at €4.16bn, so the improvement was less significant on a quarter-on-quarter basis, while net leverage, as gauged by net debt/EBITDA ratio, only mildly improved, down to 2.9x in the second quarter from 3x in the first quarter.

Third-quarter results could turn out to be particularly poor, and not only due to lower cash flows.

Second-quarter revenues were under more pressure than in the previous quarters, and came in at €6.22bn, down 5.2% and down 3.7% like-for-like, “with clear deterioration during the quarter”, it admitted, although EBITDA margin was significantly higher in both the second quarter and in the first half of the year on a comparable basis.

Cargo operations’ losses narrowed year-on-year. These assets are troubled but appear to be back on the right track despite challenging market conditions in an industry characterised by structural overcapacity. These conditions determined negative trends for most of the metrics associated to the cargo unit in the second quarter.

In the first half of 2016, cargo revenues fell 15.7% to €1bn year-on-year, but cargo EBITDA improved by €37m like-for-like, mainly as a result of restructuring efforts. As AF-KLM continued to restructure its cargo activities to address weak global trades, during the second quarter full-freighter capacity was reduced by 16%, leading to a decrease in total cargo capacity of 3.2%.

Meanwhile, revenue per ATK was down by 12.9% on a like-for-like basis. The cargo division is still in restructuring mode, and other parts of the AF-KLM group are faced with similar headwinds. In fact, the outlook is not reassuring at group level, which is reflected in a share price close to a 52-week, multi-year low of €5.04.

Some of the dangers highlighted by AF-KLM include a high level of geopolitical risk and economic uncertainty, “increasing pressure on unit revenues and special concern about France”, as a destination for travellers.

On top of that, it said that the “impact of fuel savings on P&L [is] expected to be more than offset in the coming quarters by downward pressure on unit revenue and negative currency impacts”, although free operating cash flow generation after disposals has been maintained at between €600m and €1bn this year, and it also continued to target “a significant net debt reduction”.

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Source: Transport Intelligence, August 2, 2016

Author: Alessandro Pasetti