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 flow 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).
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.
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
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.
• 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 bill 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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