Flying Blue (Air France, KLM, and Other Partners) - Disappointing financial results for AF/KL (and others in the industry)

Air France performance for the financial year 2011:


Loss for the group: 809 EUR MM
Operating loss: EUR 353 MM
Debt: EUR 6.5 BN
No dividend paid to shareholders
Prime reason according to AFKL: high oil price


Lufthansa doing somewhat better, but still overall small loss for the group (full numbres out only on March 15)


Loss for the group: EUR 23 MM
Operating profit: EUR 820 MM
Dividend will be paid
Prime reason for loss according to LH: bmi


IAG the relatively best performer


Profitfor the group: EUR 503 MM
Operating profit: EUR 485 MM
Debt: EUR 1.5 BN
Dividend will be paid
Their numbers improved significantly over the current year


This reads to me like AFKL suffers from a high cost base whilst at the same time losing passengers and cargo that actually generate some yield; like the Lufthansa Group suffering from its major expansion over the past years which turns out to be a mixed bag (great acquisition with Swiss and takeover of control of Air Dolomiti, to-be-seen with Brussels, challenging with Austrian, and a hopeless case with bmi and Lufthansa Italia); and IAG is getting its act together, although it remains to be seen to what extent the current strike situation at Iberia will negatively impact IAG's performance. AFKL clearly is the one that has the most challenges right now.

AFKL really is in a corner : loss of revenue + rise of costs = no more cash to relaunch the business

AF claims after oil prices but even with hedging, the oil price is basically the same for all players ; plus AF was notorious some years ago for having one of the best fuel hedging strategy among the industry.

Now pop the questions :
- Is the loss of revenue mainly due to the crisis (external factor) or a lack of attractiveness (internal one) ?
- Will the strategy mainly focus on costs decreasing or revenue increasing ?

Perhaps its time to stop slashing the FB benefits and start providing a programme that is enticing for travellers.

In an interview with luchtvaartnieuws.nl (http://www.luchtvaartnieuws.nl/nl-NL/Article.cms/Airlines/Topman_Peter_Hartman_KLM_doet_het_beter_dan_Air_Fr ance) KL CEO Peter Hartman attributes most of the loss to AF and asserts that KL is in a much better position, both financially and as far as labor relations are concerned.

Johan

If only KLM and BA had agreed terms a decade ago to tie themselves together!!!

Good news.They fully deserve it.I mean,what they expect?Sub-par product in C and F,crazy prices in F,very sub-par FF programme,and long history of taking they most loyal customers for fools,claiming FB has been improved,while taking away all meaningful benefits...

And this is coming from somebody who flew them and ScaryTeam exclusively - before april's fool day.Mostly in paid F,it is...

A little less arrogance for the customers,a little more investment in hard product - and the things MAY change.Unless then,well,continue to blame it on fuel prices - now thinking that shareholders are fools too.

Regards,

El Puerco Volante.

They indeed blame a lot on the fuel prices: AFKLM duikt diep in het rood, NU.nl (http://www.nu.nl/economie/2758349/air-france-klm-duikt-diep-in-rood.html)

Good news.They fully deserve it.I mean,what they expect?Sub-par product in C and F,crazy prices in F,very sub-par FF programme,and long history of taking they most loyal customers for fools,claiming FB has been improved,while taking away all meaningful benefits...


But the numbers seem to indicate otherwise. In their earnings presentation, unit revenues for long-haul premium were actually UP both in Q4 2011 as well as for the full year 2011. Long-haul economy unit revenues drove the negative numbers.

For example, for the full year, RASK (revenue per available seat kilometer) was down 1.2% (or 0.7% ex-currency) for the AFKL group, but Long-haul premium RASK was actually up 3.5%, while Economy was down 1.2%.

Makes sense. They finally get the bill for their behavior. I wonder if AF will wake up or become a small reginal carrier in a few years while the rest of Europe is split up by LH and BA.
I flew them a lot 4-6 years ago, but right now I am very happy I left this nonsense airline and interestingly the carriers I fly these days are all very profitable. Maybe there is a link between good customer service and revenue.

I agree. The huge cut in benefits for Flying Blue combined with the increasing fees leaves little reason for loyalty to AF or Skyteam. Two years ago I was Gold and a regular traveler as I felt I got some benefits from the miles earned. Since the changes I have taken exactly zero flights on Skyteam carriers. Poor frequent flyer plan and poor customer service= no business from me. Sometimes AMEX miles are useful for a KQ redemption provided you can find a FB agent that actually can book it correctly, inform you of the right amount of miles needed, and you have a person in Kenya ready to go to the KLM office to pay the taxes.

AF can't survive on the likes of Dominique Strauss-Kahn jetting off on a moments notice in F. There are a lot more people flying in Y and J that need to be taken care of and they have really fallen flat in recognizing loyalty.

But the numbers seem to indicate otherwise. In their earnings presentation, unit revenues for long-haul premium were actually UP both in Q4 2011 as well as for the full year 2011. Long-haul economy unit revenues drove the negative numbers.
For example, for the full year, RASK (revenue per available seat kilometer) was down 1.2% (or 0.7% ex-currency) for the AFKL group, but Long-haul premium RASK was actually up 3.5%, while Economy was down 1.2%.
Overall RASK was down 1.0% (not 1.2%). But as mentioned in the presentation, 2011 has seen a long-haul cabin densification due to the reduced demand in premium cabins. So the increase in premium RASK is caused by a drastic reduction in available seats J/P seats, not by a surge in premium pax. AF is losing market share in premium cabins as stressed by de Juniac.

Looking at the last slide in the presentation, AFKL has to reimburse some 4 billions in long-term debt/bonds in 2012-2014. A bit frightening.

The unions have expressed their point of view summarized in this article (http://www.deplacementspros.com/Air-France-la-CGT-condamne-le-manque-de-vision-de-sa-direction_a14189.html) or the orginal from CGT here (http://www.airfrance.cgt.fr/Doc/2012/N142012.pdf) (sorry, in French only).

To sum up, their view of the world:



Air France has had commercial success (I suppose they mean more passengers, ignoring that more pax actually meant more losses)
High oil price will further impact the airline, especially because high oil means slowdown in the global economy, which in turn negatively impacts AF's cargo business
Unions oppose all merging of AF Cargo activities with KLM/Martinair cargo activities. All cargo touching French soil must be dealt with by Air France Cargo as an entity in its own right
Closure of cargo stations in mainland France and the DOMs should stop
There is a lot of competition in the shorthaul passenger market because of ultra-liberalist policies of the European Commission. Ruling by decree and imposing sanctions on the most vulnerable airlines leads to disaster. Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs
The creation of a separate operating entity has been considered, it happening depends purely on employees' goodwill to support the current restructuring measures
It seems that management wants to extend the "productivist" work model currently deployed to the Province bases to the rest of the company.
The impact of AF's strategy will be devastating on the activities of AF's feeder airlines, especially since AF apparently prefers to sub.-contract FlyBe although this airline has a lower quality level
The maintenance business makes profit thanks to its contract with "other customers" such as Transavia and Servair
It is unacceptable to make employees responsible for the situation of the company. It's all the fault of the global economy and of changing behaviours in society
AF's difficult situation is used as a pretext to cut employee benefits, which is unacceptable
AF needs a strategic vision
The government should intervene just as it did in the case of the banking and automobile industry, all the more since the state is a shareholder
Nicolas Sarkozy is the illegitimate son of Charles de Gaulle and Brigitte Bardot


OK, I admit a lot of this seems unbelievable, but I promise I invented one thing, only one. All the rest is really the unions' view. Quiz of the day: which point have I made up?

The unions have expressed their point of view summarized in this article (http://www.deplacementspros.com/Air-France-la-CGT-condamne-le-manque-de-vision-de-sa-direction_a14189.html) or the orginal from CGT here (http://www.airfrance.cgt.fr/Doc/2012/N142012.pdf) (sorry, in French only).

To sum up, their view of the world:



Air France has had commercial success (I suppose they mean more passengers, ignoring that more pax actually meant more losses)
High oil price will further impact the airline, especially because high oil means slowdown in the global economy, which in turn negatively impacts AF's cargo business
Unions oppose all merging of AF Cargo activities with KLM/Martinair cargo activities. All cargo touching French soil must be dealt with by Air France Cargo as an entity in its own right
Closure of cargo stations in mainland France and the DOMs should stop
There is a lot of competition in the shorthaul passenger market because of ultra-liberalist policies of the European Commission. Ruling by decree and imposing sanctions on the most vulnerable airlines leads to disaster. Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs
The creation of a separate operating entity has been considered, it happening depends purely on employees' goodwill to support the current restructuring measures
It seems that management wants to extend the "productivist" work model currently deployed to the Province bases to the rest of the company.
The impact of AF's strategy will be devastating on the activities of AF's feeder airlines, especially since AF apparently prefers to sub.-contract FlyBe although this airline has a lower quality level
The maintenance business makes profit thanks to its contract with "other customers" such as Transavia and Servair
It is unacceptable to make employees responsible for the situation of the company. It's all the fault of the global economy and of changing behaviours in society
AF's difficult situation is used as a pretext to cut employee benefits, which is unacceptable
AF needs a strategic vision
The government should intervene just as it did in the case of the banking and automobile industry, all the more since the state is a shareholder
Nicolas Sarkozy is the illegitimate son of Charles de Gaulle and Brigitte Bardot


OK, I admit a lot of this seems unbelievable, but I promise I invented one thing, only one. All the rest is really the unions' view. Quiz of the day: which point have I made up?

Well, duh. 'AF needs a strategic vision'. Obviously made up.

Fun, fun, fun. In the meanwhile, Cathay and its sub Dragonair are recruiting thousands of new staff (FAs, pilots,..). And they work a bit harder.

I was talking with one of my auditor friend familiar with airline accounting practices. AF shows a huge loss on medium haul (MH) and a profit on long-haul (LH). But he said that it all depends on cost/revenue accounting. An important component of AF LH traffic are pax hubbing in CDG. So when a ticket is sold from some other European city (with a feeder flight), how revenues are split and allocated between the MH feeder flight and the LH flight makes a big difference. Take a GVA -HKG return ticket sold 1,000. If most of the revenue is arbitrarily assigned to the LH flight, the LH operational income will be good and the MH operational income will be bad. But that would change if a larger portion of revenue is assigned to the MH segment.
He suggested that showing most of the airline loss at the MH level (as AFKL does) could be a political decision for bargaining with unions.

After looking at the detailed financial results posted on the website, I find the results even more distressful!

In calendar year 2010 AFKL had income before tax of -1 billion euro, if you exclude the 1billion "paper" capital gain on Amadeus. The capital gain is "paper" because AFKL carrried Amadeus at historical cost in its balance sheet, not valued at market. -1billion is likely to be the taxable income reported to the tax authorities as capital gains are taxed separately.
In calendar year 2011 AFKL had income before tax of -1 billion again and no exceptional elements.
The net income after tax is a bit better because there is a recorded tax credit of 275 million in 2010 and 245 million in 2011.
"Deferred tax corresponding to fiscal losses are recognized as assets given the prospects of recoverability resulting from budgets and medium term plans prepared by the Group." The idea is that the taxable loss can be carried forward and use to reduce tax in the future (it will be deducted from tax on future profits, if any). But this deferred tax credit comes in deduction of Total Equity of AFKL sharehoders. To be simple, the value of Total shareholders Equity has dropped by 1bilion in 2011.
What is frightening with this 2billion loss is that it took place in a recovery period (2010-2011) where air traffic has experienced strong growth:
http://www.iata.org/pressroom/facts_figures/traffic_results/Pages/2012-02-29-01.aspx
But the picture for 2012 is less rosy, at least in Europe.

The profit figure for BA is remarkable as it experienced huge disturbances because of social actions. it "submitted" their archaic union and stilll turned out a sizeable profit.
LH was not profitable because of BMI, but they are now closing its sale.

2012 will be another horrible year for AF if they don't start to turn things around. I haven't spent a dollar on AF tickets for the last 3-4 years and don't think I will in the near future.
This year I'll make Plat again on DL and probably 1K on UA as well as *G on A3. Sorry AF, I'll take the CO 777 to PEK twice this year; maybe if the service improves and they finally get full flat C-class seats in place I might give them another chance ... until then, forget it.

After looking at the detailed financial results posted on the website, I find the results even more distressful!

In calendar year 2010 AFKL had income before tax of -1 billion euro, if you exclude the 1billion "paper" capital gain on Amadeus. The capital gain is "paper" because AFKL carrried Amadeus at historical cost in its balance sheet, not valued at market. -1billion is likely to be the taxable income reported to the tax authorities as capital gains are taxed separately.
In calendar year 2011 AFKL had income before tax of -1 billion again and no exceptional elements.
The net income after tax is a bit better because there is a recorded tax credit of 275 million in 2010 and 245 million in 2011.
"Deferred tax corresponding to fiscal losses are recognized as assets given the prospects of recoverability resulting from budgets and medium term plans prepared by the Group." The idea is that the taxable loss can be carried forward and use to reduce tax in the future (it will be deducted from tax on future profits, if any). But this deferred tax credit comes in deduction of Total Equity of AFKL sharehoders. To be simple, the value of Total shareholders Equity has dropped by 1bilion in 2011.
What is frightening with this 2billion loss is that it took place in a recovery period (2010-2011) where air traffic has experienced strong growth:
http://www.iata.org/pressroom/facts_figures/traffic_results/Pages/2012-02-29-01.aspx
But the picture for 2012 is less rosy, at least in Europe.

The profit figure for BA is remarkable as it experienced huge disturbances because of social actions. it "submitted" their archaic union and stilll turned out a sizeable profit.
LH was not profitable because of BMI, but they are now closing its sale.

Great analysis that I so far was too lazy to do, thanks brunos. Anyone already looked at some other interesting KPIs like RASK, yields, proportion of premium traffic?

The other thing that I always have to think about: AFKL cries out loud against "unfair" competition by the Gulf carriers because they have lower social charges. Do the Gulf carriers cry out againt AFKL which benefits from a nicety that does not exist in the Emirates which is tax credit on losses which can be carried forward? Maybe they should, I'd like to see the faces of those that try to hide poor performance behind "unfair competition".

Time to jump ship on Skyteam..

The results for Q1 2012 have been posted and they are dismal despite the expected positive blabla. The operational loss ("resultat d'exploitation") for one quarter of €597m is staggering. In addition, they have some accounting capital gain on the sale of Amadeus and misc. other accounting revaluation.
So the pace of losses is increasing. Wonder what is the share of AF and KL in those results?

Please compare this operational loss of €597m for ONE quarter to the total market value of AFKL of about €1 billion or its book value of about €2.5 billion. All the accounting gimmicks used to inflate book equity value will not be enough if similar losses repeat in each quarter of 2012.

Other airlines have not fared well in Q1 2012. LH has an operating loss of €381m. But that is 200 lees, and LH has announced drastic staff reductions. Note that J and J revenues have gone up to 54.9% of LH longhaul revenues. I do not wish to be too technical nor detailed, but the cash flow from operating activities is over €800m for LH while it is getting close to zero for AFKL (EBIDTAR = 37m). Did not hink that it could get that bad. Debtholders must be quite worried.

Of course, we have the usual mantra of "fuel costs". When the cost of fuel was going down, they emphasized the losses on hedging contracts. When fuel prices go up they emphasize the fuel cost. But that is the core of their business. BTW, note that salaries far exceed fuel costs as the major operational cost. And that is true even if we do not consolidate the salary cost of all the subsidiaries.

BTW, note that salaries far exceed fuel costs as the major operational cost. And that is true even if we do not consolidate the salary cost of all the subsidiaries.

This is news to me. Especially since all the 'blame' is continuously being put on rising fuel costs. I also wonder how this could be: If a medium-haul flight gulps down some ~20K euro of fuel roundtrip, labour costs would be more than that per flight? It sounds incredibly high.

I realize flight and cabin crew is not the only labour involved, but maybe ~10 hours for two GA's, an hour for flight operations and perhaps a couple minutes administrative work per flight still would, I'd expect, not get up to 20,000 euro.. (These are rough guestimates, i'd love to be proven wrong with realistic numbers)

Interesting summary.


AF can't survive on the likes of Dominique Strauss-Kahn jetting off on a moments notice in F.

It was on purpose, wasn't it?





Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs


OK, I admit a lot of this seems unbelievable, but I promise I invented one thing, only one. All the rest is really the unions' view. Quiz of the day: which point have I made up?

This one. You wouldn't think AF union have such a realistic view of the quality of their employer's product in the past few years. It was a hard one.


Great analysis that I so far was too lazy to do, thanks brunos. Anyone already looked at some other interesting KPIs like RASK, yields, proportion of premium traffic?

An interesting comparison would be between comparable companies that invested differently in their products over the past few years, to understand if our cry for better product is economically sensible. I think so, but are representative of the general flying public? I always wonder how many of us are actively selecting our carriers.


The other thing that I always have to think about: AFKL cries out loud against "unfair" competition by the Gulf carriers because they have lower social charges. Do the Gulf carriers cry out againt AFKL which benefits from a nicety that does not exist in the Emirates which is tax credit on losses which can be carried forward? Maybe they should, I'd like to see the faces of those that try to hide poor performance behind "unfair competition".

Really? I was under the impression that Gulf countries had very little corporate tax, hence very few tax to get credited back anyway.


So the pace of losses is increasing. Wonder what is the share of AF and KL in those results?

Why is KL considered to do so much better than AF? Despite a product that isn't clearly superior (and my expericence with AMS service wasn't stellar to say the least).


Please compare this operational loss of €597m for ONE quarter to the total market value of AFKL of about €1 billion or its book value of about €2.5 billion. All the accounting gimmicks used to inflate book equity value will not be enough if similar losses repeat in each quarter of 2012.

Market cap has fallen 92% from the peak: apparently investors aren't reassured by the blame-it-on-fuel-costs arguments.


Other airlines have not fared well in Q1 2012. LH has an operating loss of €381m. But that is 200 lees, and LH has announced drastic staff reductions.

Q1 2012 was also the last one with full bmi's losses. Were bmi's operating results included in LH's or were they accounted separetely?

This is news to me. Especially since all the 'blame' is continuously being put on rising fuel costs. I also wonder how this could be: If a medium-haul flight gulps down some ~20K euro of fuel roundtrip, labour costs would be more than that per flight? It sounds incredibly high.

There are lots of labour costs not related to people in the planes (70% of the labour force is on the ground). Labour costs in Q1 2011 were €1.9 billion vs 1.6 billon for fuel costs.

This is news to me. Especially since all the 'blame' is continuously being put on rising fuel costs. I also wonder how this could be: If a medium-haul flight gulps down some ~20K euro of fuel roundtrip, labour costs would be more than that per flight? It sounds incredibly high.


You can check the Q1 2012 results (and the previous ones) on: http://www.airfranceklm-finance.com/en

The fuel bill has been rising dramatically, but it is still well below salary costs.

Quote:
Originally Posted by San Gottardo View Post

Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs


OK, I admit a lot of this seems unbelievable, but I promise I invented one thing, only one. All the rest is really the unions' view. Quiz of the day: which point have I made up?
This one. You wouldn't think AF union have such a realistic view of the quality of their employer's product in the past few years. It was a hard one.

I fail either to see your logic or your sense of humour (or both). In any case, no, that was not the bit that I made up. The unions in their pamphlet actually do write "Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs"

I fail either to see your logic or your sense of humour (or both). In any case, no, that was not the bit that I made up. The unions in their pamphlet actually do write "Absurd price wars lead to a race to the bottom where airlines' value propositions increasingly resemble those of LCCs"

Never mind. I was just joking that you and the union were sharing the view that AF's product is becoming increasingly like an LCC's.

An interesting comparison would be between comparable companies that invested differently in their products over the past few years, to understand if our cry for better product is economically sensible. I think so, but are representative of the general flying public? I always wonder how many of us are actively selecting our carriers.

Why is KL considered to do so much better than AF? Despite a product that isn't clearly superior (and my expericence with AMS service wasn't stellar to say the least).



I love you sense of humour on the general flying public (I assume that it is humour, right?).
The whole AF attitude over the past decade has been: "we have a captive market, we do not need to treat them well". But the general flying public is not that uniformly dumb. Except for the family that flies once a year on vacation and wants to have a French-speaking airline, most flyers are not that dumb or masochistic. Frequent flyers can see differences in value. And profits/losses are made on the margin. With a significant proportion of premium pax defecting to other airlines (that's a fact shown in all statistics and acknowledged by the new CEO), AF is bleeding.

I am not saying that KL is better than AF, I am just asking a question. As it is repeatedly asserted (including by the new CEO) that KL cost structure is better, it seems reasonable to assume that KL is losing less money than AF. Actually, KL is hardly mentioned in the problems facing AFKL.

There are lots of labour costs not related to people in the planes (70% of the labour force is on the ground). Labour costs in Q1 2011 were €1.9 billion vs 1.6 billon for fuel costs.
How much of that were just the executives? :D

Never mind. I was just joking that you and the union were sharing the view that AF's product is becoming increasingly like an LCC's.

As long as they price the ticket like a premium carrier (e.g. Swiss), but deliver LCC serivce ... why should I fly AF?

I love you sense of humour on the general flying public (I assume that it is humour, right?).

It is. I have a little more faith in humanity than that :D


The whole AF attitude over the past decade has been: "we have a captive market, we do not need to treat them well". But the general flying public is not that uniformly dumb. Except for the family that flies once a year on vacation and wants to have a French-speaking airline, most flyers are not that dumb or masochistic.

It would be interesting to know how many of AF's customers are regular flyers and occasional flyers. Figures from Flying Blue could give some insight on that, but there is a gap between being an infrequent flyer and an FB elite.

Frequent flyers can see differences in value. And profits/losses are made on the margin. With a significant proportion of premium pax defecting to other airlines (that's a fact shown in all statistics and acknowledged by the new CEO), AF is bleeding.

Seems to be... Reversing that trend will be a challenge. The new CEO stated, from what I read in the "do" thread, that he'd try to improve the product after the end of the economic crisis. It's laudable to set a high goal (like the "competing with SQ" ad...) but I wonder if they'll have the financial leeway to improve their product when the economy gets back on track and they'll start to court premium pax again.

How much of that were just the executives? :D

Not that much. Pierre-Henri Gourgeon's salary over a quarter was 0.4 million, plus a few benefits. He notably renounced this year to the benefits of using near-free employee tickets for him and his family when union noted he had asked the board the lift the ban on these tickets during peak season for his personal use, a ban that apply to lower-ranking employees (that would be, all of them...) So he didn't pay around 100 € total for 4 tickets CDG-MRU in J, despite being exceptionnaly entitled to it.

Perhaps they should investigate branching out into private jet hire - there seems to be a well funded niche market in the BVE to BVA shuttle that has recently appeared.