Don’t cry for Air France-KLM – Things are looking up!

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By TESTCustomwebLP TESTCustomwebLP October 29, 2014 17:04

Don’t cry for Air France-KLM – Things are looking up!

Air France-KLM Q3 actually fell within all expectations post downward revision of targets for 2014 in July, and in line with targets but for the €500m cost of the two week pilot strikes in September 2014, broken down by the airline as €330m in lost revenue and €170m of lost forward bookings. Full Year EBITDA looks to be coming in at €1.7-1.8bn – that is €500m off of the 2.3bn revised target set in July. This is actually a good performance given the headwinds of home market economic stagnation which in part is causing significant FX losses that amounted to around €47m in Q3 alone. If you get rid of the strike action impact and the FX headwinds, the -61% year on year EBIT figure for Q3 flips to -2% up year on year. Therefore the management team at Air France-KLM is performing well at this time, considering. Revenue was down 7% year on year for the period but this figure is polluted by the strike action and thus is not a reflection of general performance. Long-haul capacity growth remains high through the period and in Q4 the airline may see a need to dramatically slow capacity growth.

The scale of the pilot revolt could not have been predicted and the need for a low-cost arm is clear for all to see, but there is now an upside to the strike action. In our report on Air France-KLM in late September, we pointed out the logic of an argument that the strike may provide an upside to the long term future of the airline. Air France-KLM has an opportunity to take very strong action on the back of the strike losses that will both cut costs far more rapidly than previously planned and send a clear message that strikes mean job losses: Air France-KLM management have taken the opportunity and have announced around 7,500 job losses (25% of the workforce) today as the airline looks to outsource much of its non-core operations.

For investors the key factor for Air France-KLM now lies in the speed of the process to outsource non-core operations and cut debt. But Q4 will also show forward bookings impact from the strikes and will thus earnings will remain depressed. At the same time though Air France-KLM will see a slight benefit from lower fuel costs and it is here where perhaps investors should concentrate concern for the near term, for as oil keeps falling steadily Air France-KLM will miss out on the full benefit as they are 70% hedged for Q42014 and 55% hedged for full year 2015.

Even so, the airline has €3.2bn cash on the balance sheet and €1.8bn of undrawn credit lines of which €1.6bn matures in 2016. The airline group currently trades on 2015e EV / EBITDAR of 4.5x and P/E of 9.3x, vs. 4.5x and 7.4x for legacy peer average. Air France’s lease-adjusted net leverage was 4.4x at the end of September, up from 4.0x at Q214. The “Transform 2015 plan” is fully on-track to reduce net debt to €4.5bn by FY15 from €5.27bn at this moment in time.

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By TESTCustomwebLP TESTCustomwebLP October 29, 2014 17:04