Pieter Elbers - KLM President & CEO

• Revenues of 19.7 billion euros, up 3.1% excluding strike impact, down 3.1% like-for-like
• EBITDAR of 2,658 million euros, an improvement of 388 million euros like-for-like
• Strong operating free cash flow (2) generation: 533 million euros
• Further net debt reduction: net debt (2) of 4.33 billion euros, down 1,077 million euros compared to 31 December 2014
• Adjusted net debt / EBITDAR ratio (3) of 3.4x, an improvement of 0.6 compared to 31 December 2014

Full year 2015 outlook

• Unit cost target: reduction in the 0.5% to 0.7% range (4) (previously: in the 1.0% to 1.3% range)
• End 2015 net debt target unchanged: around 4.4 billion euros, down 1 billion euros compared to end of 2014

The Board of Directors of Air France-KLM, chaired by Alexandre de Juniac, met on 28 October 2015 to examine the accounts for the Third Quarter of the Financial Year 2015.

1) Like-for-like: excluding currency and September 2014 pilot strike. Same definition applies in rest of press release
2) See definition in appendix
3) Trailing 12 months, EBITDAR adjusted for September 2014 pilot strike impact; see definition in appendix
4) On a constant currency, fuel price and pension-related expense basis. See computation in appendix

Third Quarter 2014 activity was strongly affected by 14 days of strike by Air France pilots, which had an estimated negative impact of 330 million euros on the operating result. Total revenues were reduced by an estimated 416 million euros, partly offset by 86 million euros of net savings on costs. The strike led to the cancellation of an estimated 4,249 million ASKs (18% of September ASKs) and 213 million ATKs (16% of September ATKs) resulting in an equivalent cancellation of 4.75 billion EASKs (Equivalent Available Seat Kilometer).

Total revenues amounted to 6,695 million euros versus 7,175 million euros in 2013, down 6.7%, but up +0.2% on a constant currency basis and adjusted for the Air France pilot strike (“like-for-like”). Currencies had a negative 78 million euro impact on revenues.

Operating costs were 1.3% lower year-on-year and 0.7% lower on a constant currency basis. Ex-fuel, they increased by 0.7% and by 0.8% on a like-for-like basis. Unit cost per EASK¹ was reduced by 1.2%, on a constant currency, fuel price, pension expense and strike adjusted basis, against capacity measured in EASK up by 2.0%, corrected for the strike. The fuel bill amounted to 1,737 million euros, down 6.4%, but slightly up (+0.4%) on a constant currency and strike adjusted basis. Total employee costs including temporary staff were down 1.6% to 1,871 million euros, and by 1.7% on a constant currency basis. On a constant pension expense and adjusted for the strike, they declined by9 million euros.

EBITDA amounted to 682 million euros, a decrease of 397 million euros. On a like-for-like basis, EBITDA decreased by 21 million euros. The operating result stood at 247 million euros versus641 million euros in 2013, a 394 million euro decrease. Like-for-like, the operating result decreased by 18 million euros. Currencies had a 47 million euro net negative impact on the Third Quarter operating result.

The net result, group share stood at 100 million euros against 148 million euros a year ago. It includes the non current result of the Amadeus transaction (187 million euros), mainly offset by the change in value of the fuel hedging portfolio (-172 million euros). On an adjusted basis⁴, the net result, group share stood at 111 million euros against 372 million euros in Q3 2013, a 261 million euro decrease.

In the first Nine Months of 2014, total revenues stood at 18,7 billion euros versus 19,4 billion euros in 2013, down 3.6%, but up +0.4% on a like-for-like basis. Currencies had a negative 365 million euro impact on revenues.

Operating costs were reduced by 2.8% and by 1.4% on a constant currency basis. Ex-fuel, they decreased by 1.6%, and by 1.0% on a like-for-like basis. The fuel bill amounted to 4,926 million euros, down 6.1%, and down 0.8% on a constant currency and strike adjusted basis. Total employee costs including temporary staff were down 3.1% to 5,651 million euros, and by 3.0% on a constant currency basis. On a constant pension expense, scope and strike adjusted basis, they declined by 115 million euros as a result of the Transform 2015 actions.

EBITDA declined by 200 million euros to 1,273 million euros, resulting in an EBITDA margin of 6.8%, a 0.8 point decrease on 2013. On a like-for-like basis, EBITDA improved by 224 million euros. The operating result stood at 40 million euros versus 193 million euros in 2013. On a like-for-like basis, the operating result improved by 267 million euros. Currencies had a 92 million euro net negative impact on the operating result in the first nine months of 2014.

The net result, group share stood at -514 million euros against -651 million euros a year ago. It includes the non-current result of the Amadeus transaction (187 million euros), the change in value of the fuel hedging portfolio (-146 million euros), foreign exchange losses (including the adjustment in the value of the cash held by the Group in Venezuela), and the impairment charges related to the Cargo business. On an adjusted basis[1], the net result, group share stood at -231 million euros against-314 million in the first nine months of 2013, an 83 million euro improvement.

Earnings and diluted earnings per share both stood at -1.74 euros (-2.20 euros in 2013), and at-0.78 euros on an adjusted basis (-1.06 euros in 2013).

[1] See definition in appendix
 

PASSENGER BUSINESS

In the Third Quarter 2014, passenger revenues amounted to 5,232 million euros, down 8.2% and 0.3% like-for-like. The operating result of the passenger business stood at 211 million euros, versus 584 million euros in Q3 2013, a decrease of 40 million euros on a like-for-like basis (-373 million euros on a reported basis).

The Group maintained its strict capacity discipline, increasing total passenger capacity by only 1.6% excluding strike impact. Unit revenue per Available Seat Kilometer (RASK) remained volatile, down by approximately -1.8% on a like-for-like basis after a +1.3% increase in the second quarter.

On the long-haul network, unit revenue was affected by industry overcapacity on certain parts of the network, a disappointing performance on the Latin American network on the back of lower economic growth in several markets, and high comparables in the third quarter last year (long-haul RASK up 2.9% at Q3 2013 compared to Q3 2012, of which +5.6% on Latin America).

As planned within the framework of Transform 2015, point-to-point (not linked to the Paris-CDG and Amsterdam hubs) short and medium-haul capacity was significantly reduced (down 14.2%, excluding strike impact), leading to a significant improvement in unit revenue (estimated at +7.6% like-for-like). Total short and medium-haul RASK improved by 1.6% like-for-like, in line with the second quarter.

For the 2014-15 Winter season (November 2014 to March 2015), the Group will maintain its strict capacity discipline in the passenger business, with stable capacity (planned ASK growth: +0.1%), notably including a reduction of 11.3% in short and medium-haul point-to-point capacity.

As a result of Transform 2015, and in spite of the low capacity growth, the passenger activity delivered a further decrease in unit cost, with Cost per Available Seat Kilometer (CASK) down by 1.2% like-for-like.

In the first Nine Months of 2014, passenger revenues amounted to 14,709 million euros, down 3.7%, but up 0.8% like-for-like. The operating result of the passenger business stood at 88 million euros, versus 233 million euros in the same period last year. Like-for-like, it improved by 226 million euros.

Unit revenue per Available Seat Kilometer (RASK) fell by 2.9% and by 0.3% like-for-like. Unit costs (CASK) were reduced by 1.9%.

CARGO BUSINESS

Third Quarter 2014 cargo revenues amounted to 623 million euros, down 9.4% and by 3.6% on a like-for-like basis. The Group continued to reduce full-freighter capacity (down 7% in July and August), leading to a decrease in total capacity of -0.5% on a like-for-like basis. Demand remained weak, with unit revenue per Available Ton Kilometer (RATK) decreasing by 2.1% on a like-for-like basis, and by 3.5% on a reported basis.

The operating result amounted to -102 million euros, down 2 million euros on a like-for-like basis.

In the first Nine Months of 2014, cargo revenues amounted to 1,967 million euros, down 6.0% and by 2.3% on a like-for-like basis. Unit revenue per Available Ton Kilometer (RATK) decreased by 2.9% and by 0.7% on a like-for-like basis.

On a like-for-like basis, cargo unit cost was down 1.7% in the first nine months. The operating result improved by 3 million euros and by 24 million euros like-for-like.

At its Perform 2020 investor day in September, the Group announced the finalisation of its cargo repositioning plan: it is implementing a significant further reduction in its full-freighter fleet, from 14 aircraft in operation in 2013 to 5 aircraft by the end of 2016. This reduction should enable the full-freighter business to return to operating breakeven in 2017 (versus a loss of €110 million in 2013 and a €200 million loss including bellies).

MAINTENANCE

Third Quarter 2014 third party maintenance revenues amounted to 319 million euros, up 4.2% and by 5.3% on a constant currency basis, driven by the consolidation of Barfield, a US component support business. The operating result stood at 61 million euros, up 7 million euros year-on-year. The Air France pilot strike had a 22 million euro impact on operating result due to lower internal revenues from the maintenance of the Air France fleet. Excluding strike impact and at constant currency, the operating result was up 27 million euros.

In the first Nine Months of 2014, third party maintenance revenues amounted to 895 million euros, down 3.5% and by 0.5% on a constant currency basis. The operating result increased by 2 million euros to 113 million euros. Like-for-like, the operating result improved by 31 million euros, representing a 1.2 point increase in operating margin.

Over the period, the Group recorded a 20% increase in its order book to 5.3 billion euros, including a major contract with Air China covering the maintenance of GE90 engines.

OTHER BUSINESS:
TRANSAVIA

In the Third Quarter of 2014, Transavia capacity was up 8.3%, reflecting the accelerated development in France (up 21.4%) and the ongoing repositioning in the Netherlands (with scheduled capacity up 15.3% and charter capacity down 3.7%). Traffic rose 6.0%, and load factor remained high (91.8%, down 1.9 point). Unit revenue was down 0.6%, but up 0.5% in France despite the rapid increase in capacity. Transavia’s total revenue stood at 427 million euros, up 7.6%. The operating result was 62 million euros, down 4 million euros year-on-year.

In the first Nine Months of 2014, Transavia traffic increased by 6.5% for capacity up 6.9%, leading to a 0.4 point decrease in load factor to 90.3%. Unit revenue was down 0.8%. Total revenue stood at 861 million euros, up 5.9%, while the unit cost per ASK decreased by 0.7%, but increased by 0.3% on a constant currency basis. The operating result decreased by 14 million euros to -2 million euros, mainly due to the rapid ramp up in France.

For the 2014-15 Winter season, Transavia will continue its rapid growth in France, with a planned 56% capacity increase (+13.3% including activity in the Netherlands).

In October 2014, Air France and its pilots’ unions finalized a draft agreement relating to the development of Transavia in France. If this agreement is validated, it will ensure 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 largest low cost carrier at Paris-Orly by Summer 2015.
• 37 Boeing 737s in operation by 2019, operating flights potentially on departure from all French airports excluding the Paris-CDG hub, notably on destinations already served by Air France.
• Transavia to maintain its own operating and remuneration conditions, which are key to achieving its unit cost and operating flexibility objectives.

OTHER BUSINESS:
CATERING

Third Quarter 2014 third party catering revenues amounted to 82 million euros, up 5.1%. At constant scope (excluding the impact of the sale of Air Chef that occurred in Q2 2013), third party revenues increased by 6.5%. The operating result increased by 2 million euros like-for-like, corrected for the impact of the Air France pilot strike on internal revenues.

In the first Nine Months of 2014, third party catering revenues amounted to 234 million euros, up 8.8% at constant scope. Like-for-like, the operating result increased by 5 million euros.

FINANCIAL SITUATION

In the first Nine Months of 2014, the fall of 200 million euros in EBITDA, primarily due to the Air France pilot strike, translated into a 183 million euro reduction in cash flow before change in WCR and cash out related to Voluntary Departure Plans. The Group disbursed 162 million euros for Voluntary Departure Plans representing nearly all of the cash out expected in the Financial Year.

Change in WCR was also affected by the strike, with delayed sales partly offset by not yet processed reimbursements. Net investments before sale & lease-back transactions stood at 1,106 million euros.

As a result, operating free cash flow amounted to minus 75 million euros, versus a positive 496 million euros a year earlier. Operating free cash flow does not incorporate 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 5.27 billion euros at 30^th September 2014, versus 5.35 billion euros at 31^st December 2013. The 12 months trailing net debt / EBITDA ratio stood at 3.2x at 30 September 2014 compared to 3.1x at 31^st December 2013. Corrected for the strike impact, it was down to 2.7x.

OUTLOOK

Delivery on the Transform 2015 plan is fully on track, and several key initiatives of Perform 2020, the new strategic plan covering the period 2015-2020, have been launched.

In July, the tough operating environment led the Group to revise its 2014 EBITDA target to between 2.2 and 2.3 billion euros.

Long-haul industry capacity growth remains high, though lower in comparison to the summer season, and economic activity is recovering slowly in Europe. In addition to the 330 million euro direct impact of the Air France pilot strike on the third quarter operating result, the Group noted the build-up of a delay in fourth quarter booking trends, without being able precisely to apportion responsibility for this delay between the strike and the unfavorable demand trend seen since the early summer and subsequently confirmed. The Group estimates that part of this delay could be progressively reduced over the coming weeks, without being able to quantify this adjustment exactly given the exceptional nature of the event.

As announced on 8 October 2014, all of the above elements could have an impact of around 500 million euros on EBITDA for the 2014 financial year.

Moreover, while continuing to implement the Perform 2020 plan, the Group has the firm intention to limit the financial consequences of the pilot strike and of the weaker unit revenue trend that developed over the past summer. This will be achieved thanks to the further adaptation of its investment plan, the acceleration of unit cost reduction measures, and through dynamic management of its asset portfolio.

                                                                    ******

The Third Quarter 2014 accounts are not audited by the Statutory Auditors.

1. Revenues of 5.55 billion euros, stable on a like-for-like basis, impacted by Easter calendar effect
2. Operating result of -445 million euros, an improvement of 87 million euros
3. EBITDA¹ of -50 million euros, an improvement of 66 million euros
4. Reported unit cost[1] down 4.3%, and 1.7% like-for-like

FULL YEAR 2014 OUTLOOK: OBJECTIVES CONFIRMED

1. Positive effect of Transform 2015
2. Operating environment remains tough
3. Measures underway to address headwinds from Caracas route and the slower than expected recovery in cargo demand

[1] See definition in appendix

First Quarter 2014 revenues stood at 5,554 million euros versus 5,681 million euros in 2013, down 2.2%, but stable on a constant currency and scope basis (like-for-like). Currencies had a negative 108 million euro impact on revenues.

Operating costs were reduced by 3.4% and by 2.0% on a constant currency basis. Ex-fuel, they decreased by 2.3%, and by 1.3% on a constant currency basis. Unit cost per EASK¹ (Equivalent Available Seat Kilometer) was reduced by 4.3%, and by 1.7% on a constant currency, fuel price and pension expense basis, against capacity measured in EASK up by 1.2%. The fuel bill amounted to 1,553 million euros, down 6.3%, and down 3.5% on a constant currency basis. Total employee costs including temporary staff were down 3.8% to 1,846 million euros, and by 3.6% on a constant currency basis. At constant pension expense and scope, they declined by 60 million euros, well on track towards the 120 million euro reduction targeted for the full year.

EBITDA amounted to -50 million euros,  an improvement of 66 million euros. The EBITDA margin stood at -1.0%, a 1.0 point improvement on 2013. The operating result stood at -445 million euros versus -532 million euros in 2013, an 87 million euro improvement. Currencies had a 15 million euro net negative impact on First Quarter operating result.

Net result, group share stood at -608 million euros against -641 million euros a year ago. It was impacted by 117 million euros of foreign exchange losses, in particular related to an adjustment in the value of the cash held by the Group in Venezuela, to take into account the currency conversion risk. On an adjusted basis[1], the net result, group share stood at -485 million euros against-652 million in First Quarter 2013, a 167 million euro improvement.

Earnings and diluted earnings per share both stood at -2.05 euros (-2.17 euros in 2013), and at -1.64 euros on an adjusted basis (-2.20 euros in 2013).

[1] See definition in appendix

Passenger business

First Quarter 2014 passenger revenues amounted to 4,365 million euros, down 1.9%, but stable on a constant currency basis. The passenger business was particularly impacted by the calendar effect of Easter, which fell in March last year. The operating result of the passenger business stood at -378 million euros, versus -447 million euros in Q1 2013, an improvement of 80 million euros on a constant currency basis.

Total passenger traffic rose by 2.1% while capacity rose by 1.3% leading to a 0.6 point improvement in load factor to 82.8%. Unit revenue per Available Seat Kilometer (RASK) fell by 2.5% and by 0.7% like-for-like. Unit costs (CASK) were reduced by 3.9% and by 2.4% like-for-like.

Long-haul traffic rose 2.2% for a 2.1% rise in capacity, leading to a stable load factor at 85.2%. Long-haul RASK was down 0.4% like-for-like.

Cargo Business

As planned in the framework of Transform 2015, medium-haul capacity was reduced by 2.2%. Traffic rose by 1.6%, leading to a 2.7 point improvement in load factor to 73.3%. Medium-haul RASK improved by 0.6% like-for-like.

First Quarter 2014 cargo revenues amounted to 676 million euros, down 3.4% and by 1.3% on a constant currency basis. Traffic experienced a slight upturn, rising by 1.9% for a 0.9% decline in capacity, leading to a 1.8 point increase in load factor to 64.8%. However, the yield remained weak, leading to a 1.0% decline in unit revenue per Available Ton Kilometer (RATK) on a constant currency basis (-3.0% on a reported basis).

Thanks to a reduction in unit cost (down 3.7% on a constant currency basis, and 5.4% on a reported basis), the operating result improved, from -50 million euros in Q1 2013 to -34 million euros. Nevertheless the recovery of cargo demand is taking longer than expected, and further scenarios are now under consideration to restructure the full freighter business in order to accelerate the turnaround.

Maintenance

First Quarter 2014 third party maintenance revenues amounted to 290 million euros, down 4.0% and by 1.9% on a constant currency basis, reflecting quarterly variations in the scheduling of engine shop visits. The operating result stood at 22 million euros, up 2 million euros year-on-year. The operating margin stood at 2.7% versus 2.5% a year earlier. In the quarter, the group recorded a 15% increase in its order book to 5.2 billion euros, including a major contract with Air China to cover the maintenance of GE90 engines.

Other business: Transavia

In First Quarter 2014 Transavia traffic rose 8.4% for capacity up 7.6%, leading to a 0.6 point increase in load factor to 86.3%. Unit revenue was down 4.3%, also affected by Easter timing. Transavia’s total revenue stood at 139 million euros, up 3.7%. The operating result was -58 million euros, down 7 million euros year-on-year.

Other business: Catering

First Quarter 2014 third party catering revenues amounted to 73 million euros, down 13.1% reflecting the deconsolidation of Air Chef. They were up 12.3% at constant scope.

Financial situation

The further improvement in EBITDA translated into an 84 million euro increase in cash flow before change in WCR and the cash out related to Voluntary Departure Plans.

In the First Quarter net investments before sale & lease-back transactions stood at 327 million euros, in line with the Transform 2015 full year capex budget. Operating free cash flow amounted to -80 million euros, versus a positive 40 million euros a year earlier, partly due to the fact that Q1 2013 benefited from a cash inflow of 77 million euros from sale and lease-back transactions.

Net debt amounted to 5.54 billion euros at 31 March 2014, versus 5.35 billion euros at 31 December 2013. The slight increase in net debt reflects foreign exchange losses partly relating to Venezuela. At 2.9x, the net debt / EBITDA ratio was stable compared to 31 December 2013.

Outlook
Delivery on the Transform 2015 plan is fully on track. However, the general operating environment remains tough. Under these conditions, the group remains committed to its objective of an EBITDA in the region of 2.5 billion euros in Full Year 2014, subject to the successful implementation of the measures aimed at compensating for the slower than expected recovery in cargo demand and the network adjustments linked to the situation on the Caracas route, and no reversal in other operating trends. The group will continue to reduce its net debt in line with its objective of 4.5 billion euros in 2015.