Air France-KLM showed a one percent gain in first-quarter operating profits that disappointed analysts. Lower cargo volumes and currency pressures hit profit growth.
Shares were also sharply lower in trading Thursday, after the airline’s operating earnings reached 415 million euros ($571.4 million) in the three months to June 30. Air France-KLM says it is on track to reach its financial objectives for the year.
Full statement: First quarter 2007-08
Dynamic passenger activity, driven by long haul
Operating income up slightly to 415 million euros in line with our expectations
Net income of 415 million euros (+70%)
On track to achieve our objectives for the full year
p>First Quarter to 30th June 2007: 415 million euros in operating income
In line with our expectations, the first quarter was impacted by adverse calendar effects in May. Nevertheless, strong levels of activity in April and June led to an increase in profitability in the passenger business. On the other hand, as anticipated, the cargo activity continued to suffer from weak unit revenues. Total revenues progressed by 2.5% to 5.94 billion euros after a negative currency impact of 2.5% for production measured in EASK (equivalent available seat kilometres) up 3.7%. Unit revenue per EASK was slightly down by 0.9%, but rose by 1.8% excluding currencies. Operating costs rose by 2.6% to 5.53 billion euros, but by just 1.3% excluding fuel. Unit costs per EASK dropped by 0.6% and by 1.0% on a constant currency and fuel price basis.
The main changes in operating costs were as follows:
á The fuel bill rose 8.3% to 1.09 billion euros reflecting a 2% increase in volume, a rise in fuel price after hedging of 15% and a favourable currency effect of 8%.
á Employee costs rose by 4.1% to 1.73 billion euros for a stable headcount (+0.8%).
Operating income rose slightly to 415 million euros from 411 million euros at 30th June 2006 (+1%). The adjusted operating margin was stable at 7.8% (8.0% at 30th June 2006).
During the first quarter the group recorded a capital gain of 40 million euros on the disposal by Servair, of its holding the UK catering company, Alpha, as well as an additional gain of 82 million euros on Amadeus. As a result, income from operating activities progressed by 38.4% to 537 million euros (388 million euros at 30th June 2006).
Net interest costs continued to fall, from 46 million euros at 30th June 2006 to 31 million euros at 30th June 2007. Other financial income and charges went from a charge of 32 million euros to income of 97 million euros, mainly due to gains on derivative instruments.
As a result the pre-tax income of fully integrated companies amounted to 603 million euros against 310 million euros a year earlier (+94.5%).
After a tax charge of 174 million euros (87 million euros at 30th June 2006) and a negative contribution from associates of 9 million euros, net income, group share stood at 415 million euros versus 244 million euros at 30 th June 2006, an increase of 70.1%. Net earnings per share stood at 1.49 euros and net diluted earnings per share 1.34 euros at 30th June 2007 (versus 0.92 euros and 0.86 euros respectively at 30th June 2006).
Information by activity
During the first quarter of 2007 traffic progressed by 4.0% with a 4.2% rise in capacity, leading to a virtually stable load factor of 81.4% (-0.2 points). The group carried 19.3 million passengers (+1.4%). Long-haul activity remained dynamic with a 3.4% increase in passengers carried and increasing unit revenues despite a highly negative currency impact.
Total passenger revenues rose 3.2% to 4.76 billion euros despite a negative currency impact of 2.6%. Operating income increased by 9.1% to 396 million euros. The adjusted operating margin1
progressed slightly to 9.0% (8.8% at 30th June 2006).
On a constant currency basis unit revenue per RPK rose 2.6% and unit revenue per ASK by 2.4%. Unit cost per ASK declined by 0.8% on a constant currency and fuel price basis.
Cargo saw a 1-point increase in load factor thanks to the improvement recorded in June and confirmed in July, but the pressure on unit revenues remained strong during the quarter. The group carried 371,000 tonnes, up 2.5% year-on-year.
Total revenues of the cargo activity amounted to 689 million euros, down 5.5% after a negative currency impact of 3.5%. The business recorded an operating loss of 17 million euros versus income of 28 million euros a year earlier.
On a constant currency basis, unit revenue per tonne kilometre (RRTK) and per available tonne kilometre (RATK) declined by 2.7% and 1.3% respectively. Unit cost per ATK rose by 1.4% on a constant currency and fuel price basis.
The maintenance activity improved with third party maintenance revenues up 5.5% to 243 million euros (231 million euros a year earlier) and operating income rising from 3 million euros to 13 million euros.
Revenues from other activities stood at 251 million euros up from 229 million euros at 30th June 2006 (+9.6%) of which transavia.com accounted for 177 million euros and catering 57 million euros. Operating income improved to 23 million euros from 17 million euros a year earlier.
Financial position: further reduction in net debt
Operating cash flow amounted to 769 million euros at 30th June 2007 after two one-off payments for a total of 308 million euros: a compensation payment of 110 million euros to the State in respect of the cost of the shares-for-salary exchange scheme of 2005 and an additional payment of 198 million euros to the fund managing the retirement severance payments of Air France employees. The latter payment will lead to a reduction in future contributions. Tangible and intangible investments amounted 720 million euros.
The balance sheet structure continued to improve, with net debt of 3.31 billion euros (3.59 billion euros at 31st March 2007) and shareholders’ equity of 9.0 billion euros (8.41 billion euros at 31st March 2007) of which 0.7 billion euros relating to the valuation of financial instruments. The group’s cash position stood at 4.3 billion euros.
The net debt ratio declined from 0.43 at 31st March 2007 to 0.37 at 30th June 2007.
Outlook: on track to achieve our objectives for the Full Year
Air France-KLM confirms these First Quarter results are in line with its expectations and it is on track to achieve its objectives for the Full Year of a further rise in operating income and a return on capital employed of 7%.