Air France-KLM (ticker: AF) has announced its first-quarter 2024 earnings, reflecting a resilient performance in the face of geopolitical tensions and operational challenges. The company reported a revenue increase of 5%, bolstered by stable capacity deployment, robust load factors, and improved passenger yield. Despite incurring one-time costs totaling €730 million, the airline maintained a disciplined financial strategy with a net debt-to-EBITDA ratio of 1.3x.
The forward bookings look promising, and the company is nearly 70% hedged. CEO Ben Smith expressed confidence in meeting the company's midterm financial goals, including a 7-8% operating income margin, despite acknowledging the need for consolidation in the European market.
Key Takeaways
- Air France-KLM saw a 5% increase in revenue, aided by strong unit revenue for Transavia and favorable fuel prices.
- The company maintained financial discipline, reporting a stable net debt between €5.1 billion and €5.2 billion, with net debt-to-EBITDA at 1.3x.
- One-time costs amounted to €730 million due to payments to Air France pilots and deferred social charges and wage taxes.
- The fleet renewal program is on track, supporting the company's decarbonization efforts.
- Over 40 labor agreements have been signed, emphasizing labor relations and productivity.
- The company is preparing for the upcoming Paris Olympic and Paralympic Games and expects increased demand.
- Challenges in European market consolidation were acknowledged due to competition and market dominance concerns.
- CEO Ben Smith highlighted a 7-8% target for operating income margin in the coming years.
- Air France-KLM plans to repay €350 million in bonds through strong cash reserves and market opportunities.
Company Outlook
- Air France-KLM is confident in achieving its midterm financial ambition with a 7-8% operating income margin.
- The company expects a unit cost increase of 1-2% in the second quarter.
- Stable corporate travel demand and slight increases in premium cabin bookings for international flights are reported.
- Forward bookings remain strong, with a nearly 70% completion of the company's hedging policy.
Bearish Highlights
- The company faced operational challenges in Q1, including spare parts shortages.
- A significant one-time payment of €730 million was reported due to exceptional costs.
- Consolidation activities in Europe present challenges, with competition and market dominance issues.
- Cargo demand is expected to drop in Q2 but normalize in the latter half of the year.
Bullish Highlights
- The fleet renewal contributes to the decarbonization strategy and operational efficiency.
- Transavia's strong unit revenue and the positive impact of the wheely bag fee bolster earnings.
- The partnership with Delta and China Eastern is expected to stabilize and share value.
- The company sees opportunities for nonstop service into Brazil and a strong European market presence.
Misses
- Despite overall growth, the company incurred one-time costs of €730 million.
- Load factors for Q2 are slightly down compared to previous periods.
Q&A Highlights
- CEO Ben Smith discussed the necessity of consolidation in Europe and the challenges it poses.
- The company addressed the potential interest in TAP Portugal and the challenges of competitive overlap.
- Air France-KLM plans to reduce hybrid capital by replacing it with normal debt over time.
- The company confirmed €500 million per year in deferred social charges and wage taxes for the next three years.
Air France-KLM's first-quarter 2024 earnings call revealed a company navigating through a complex landscape with strategic financial management and a focus on growth. While facing significant one-time costs and the challenges of market consolidation, the airline is making strides in its decarbonization efforts and preparing for increased demand during the upcoming Paris Olympic and Paralympic Games. With strong forward bookings and a disciplined approach to liquidity, Air France-KLM is poised to continue its path toward its financial goals in the competitive aviation industry.
Full transcript - None (AFRAF) Q1 2024:
Operator: Good morning and welcome to the Air France-KLM First Quarter 2024 Results Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Ben Smith, CEO; and Steven Zaat, CFO. Please go ahead, sirs.
Ben Smith: Time for the presentation of Air France-KLM's results for the first quarter of 2024. I'm joined today by Steven Zaat, our CFO. We will be available to take your questions at the end of this presentation. I'll start by sharing the first quarter highlights and then Steven will take over for a detailed presentation of our financial performance and the outlook for the quarters ahead and then after we'll conclude and take your questions. So moving to Slide 3, looking at our performance over the first quarter. Despite a challenging start to the year marked by further geopolitical tensions, our activity was resilient. Although our operating income is down compared to the same quarter last year mainly due to both exceptional disruption costs and a slower cargo business who's facing significant headwinds, our group revenues are up 5% driven by steady capacity deployment, robust load factors and improved passenger yield. China travel demands remain quite strong. Forward ticket sales are holding firm and point to a promising summer season generating positive adjusted free operating cash flow in the first quarter. On the balance sheet side, we maintain a disciplined approach both in terms of available liquidity and financial leverage. Our cash position remains strong thanks to particularly the redemption of the OCEANE 2026 bonds and the positive impact of deferred social charges. Our net debt-to-EBITDA ratio is broadly stable and well under control at 1.3x. Our fleet renewal is advancing at a steady pace with the continuous delivery of next generation aircraft. Quarter after quarter we get one step closer to our overall fleet renewal targets, a key pillar of our decarbonization strategy. Moving on to Slide 5. Productivity and labor relations is a pillar of our strategy. It stands at the core of our values as a powerful driver of Air France-KLM's performance and is the cornerstone of our approach targeting increased employee engagement and alignment with the company's strategic vision. Since January 2023, this approach involved constant dialog and has fostered since the signing of more than 40 labor agreements covering our entire organization, each reflecting our dedication to fair compensation and the well-being of our workforce while also remaining in line with industry benchmarks. The dynamic trend in our Employee Promoter Score as well as our employee dissatisfaction and engagement levels prove that these efforts do resonate with our colleagues. These positive outcomes not to only position us as an employer of choice and a great place to work, but they also directly impact our ability to attract and retain top talent. Steven will now take over and go through in more detail our financial performance for the first quarter.
Steven Zaat: Good morning, everybody, and thanks for joining this call. So as already indicated by Ben, the first quarter has been pretty tough. We indicated that already with the full year results. We had quite a difficult operational climate especially related to the spare parts situation. But what is good to see is that we are seeing now actually the fruit of all the measures which KLM is taking to improve the operational performance. So since the end of the quarter and also in April, May, you see that we are stabilizing the operation at KLM, which has a positive impact especially on the disruption costs. And then of course also the cargo still coming down in the first quarter as we also expected because we know that the capacity was not yet fully there in terms of passenger capacity, which also holds the cargo capacity in the belly. So if we go to Page 6, you see that revenues further grow with more than 5%. We had a very strong relatively pax-unit revenue, it was up 2.1%. Especially Transavia had a unit revenue of almost 10% despite the fact that they increased significantly the capacity, but I will come back on that later. And then you see that we have a hit of almost €160 million on the cargo unit revenue. The part was expected, but we also had an IT tool implementation, which costed us €23 million for the group in this quarter. It is solved now so the operation is stabilized, but we will still see an impact of around €7 million in the next quarter, but the operation has been stabilized as before. And then we had a tailwind from the fuel price of €144 million if you include also the additional ETS cost. And then on the unit cost you see, as we already indicated, there's a minus €100 million in incidentals; €50 million which was onetime payment salary at KLM and €50 million related to disruption cost. But again the good news is we stabilized now the operations. We have 75 FTEs relieved at the line maintenance because we stopped all the outsourcing of third parties at Schiphol and at the same time, we outsourced other Cjax of the 737 and the Ajax on the A330. We are daily busy to manage actually our supply chain, but we see that operations are stabilizing in the second quarter and also the starting of the summer at KLM went pretty well. If we then go to the next slide on Page 7, there you see the increase of the unit revenue and I'll come back on it later. I will just take -- I'll come back on it later. But we see an increase of 1.7% of unit revenues at the passenger business despite the capacity growth of almost 4%. Cargo at minus 26%, not as much down as in Q4, but again we had this €23 million of this IT system change. Then the positive surprise and the positive news is that we grew capacity at Transavia in, let's say, the most difficult season and we see that the unit revenue went up with 10% and we improved even our operating result despite the fact that this is a loss making quarter always for our low-cost activity. So this is a very good sign of what to come in Q2 and Q3 on Transavia. We have stable operations and we see demand is there. Then on the maintenance despite the fact that maintenance is working in quite a difficult environment, we see that we grow further our third-party revenues especially on the next generation aircraft and there's new fleet phasing in from external customers. We grew our revenues with more than €40 million on the components especially a 60% growth on the 787 fleet. And on the engines, we saw that now the issues on the G19s are solved so that brought another €70 million in our engine shop and we grew with our CVM platform with €50 million. So stable -- significant increase in our revenues third-party for the maintenance and also growing our operating result. On Page 8, you'll see the results per airline. So to start with Air France, minus €68 million. You should take into account that the Flying Blue Miles are now reported separately. So that has a negative impact if you compare year-over-year for Air France and KLM. And then we had especially on Air France or it was actually only on Air France, the IT tool implementation impact. So if you disregard that €26 million and you disregard the carve-out of Flying Blue, Air France was more or less flattish. And KLM, as already indicated, €50 million coming from the onetime payment in salary and €50 million coming from a high customer compensation in January and February. It's interesting to see that if you look at Flying Blue, we have now a margin of 24%. We didn't restate in 2023 because that's pretty difficult in all the accounting flows we have over there. So from next year we will report year-over-year, but it's good to see that actually the Flying Blue is delivering the results even better than we expected at the group. On Page 9, you will find the world map. So as already indicated, we had an increase of capacity of 4.5% with a revenue increase -- an yield increase of 1.5% and again we increased our load factor. On the premium side, you see that the yield is dropping with minus 0.6%, which is fully related to a mix impact. We grew capacity to Asia, which has a longer stage length. So if you just take that out, actually the network impact only at Air France is already 1.8%. So the negative yield has nothing to do with lower pricing in the premium, but it's all related due to the network mix. On the long haul still strong performance, we grew 4% with a further increase of load factor and a further increase of yield. In North America we had a stable yield, but driven also by an increase of our load factor of almost 2% despite the fact that we increased the capacity further with 3.3%. And then on South America, that is just a fine-tuning of our network in South America. We didn't actually adjust significantly their capacity, but we needed some planes to fly to Asia. So it's just a small adjustment and you see that the load factor is still at 90% with a very strong yield environment and even further increasing by 1.1%. Then the Caribbean so we reduced capacity by 14%, but the good news is we increased the ticket prices there with 11%. So actually we compensate with the ticket prices the reduction of capacity and the reduction of revenues. And then on Africa, we know that we have a difficult geopolitical context over there so we reduced capacity by minus 5%. But actually we still hold quite high yields in the whole region, which were up 2% with a load factor of 85%. And then the big increase is coming from Asia and the Middle East so we doubled the capacity to China, we grew to Japan with more than 60%, we doubled the capacity to Korea. And then you see that this increase of capacity has also an impact on our yields. Of course the Middle East was still hampered by the geopolitical situation. If you carve out the 6.9% drop in yield, you will see that around 10% is coming from the Middle East and for Asia, the rest of Asia is minus 7%. And we see still very strong bookings in Southeast Asia especially in Vietnam and in Thailand. On the short and medium haul, we grew slightly with 2%; but also the yields we increased further by 2.6% and load factors still further going up. And then Transavia, 11% more capacity with a drop of 2% in load factor with a 12% increase of ticket pricing. So very promising for the next quarters to come for Transavia. Then we go to Page 10. So we had a positive free cash flow especially supported by the promising summer ticket sales. There was €1.5 billion coming from the ticket sales. And then as we already signaled into the market, we had a onetime payment of the Air France flight -- sorry, on the pilots for Air France so that was €610 million and we had a quarter of €120 million of the deferred social charges and wage taxes at KLM. So in total, there is an exceptional of €730 million in. If you add then also, as we always do, the payment of the lease debt and the net interest cost because we changed actually the definition of operating free cash flow. We took out the net interest cost as we actually following a new IFRS directive, which will put in place I think in 2027 this way of reporting the cash. First, you see €140 million if you take the IFRS definition. If you take out the exceptionals and you add the payment of lease debt and net interest, you see that we have a recurring adjusted operating free cash flow of almost €600 million. Net debt stable of €140 million coming from the operating free cash flow, but we had new leases to be extended. So that was €160 million and there's a small currency impact. So we get to €5.1 or €5.2 billion in terms of net debt, a stable leverage of 1.3x. And despite the fact that we paid back €450 million on the OCEANE and we paid the exceptionals on the pension fund through the CRPN, we have still a very strong cash of almost €10 billion. Let's then look forward on Page 12. We indicated already during the full year results that we are aiming at an increase of unit cost of 1% to 2%. We reconfirm that again. You see that we reached the 4% exactly in line as we guided the market and there were one-offs likely disruption costs already explained and the onetime payment of the salary at KLM. So if you take that out, it would be at 2.4%. And for Q2, we guide 2% increase of unit cost. At the same time, we increased our transformation. So we have 700 projects running. We increased further. We speak now actually weekly on the profitability improvement for our both airlines and at the group level and we will further go with reducing overhead and creating further synergies. We stopped hiring support staff so there's a full hiring freeze for people on the SG&A. And we are stabilizing, and this is very important, our operations. So KLM took significant actions. As already mentioned, they stopped the third-party line maintenance; they outsourced the 737 Cjaxs to KLM U.K. Engineering, they outsourced the A330 Ajax to Sabena Technics and it really improved the operations. And it was very good to see that now with May actually the summer period starting, we were improving again our operation despite the fact that we also increased significantly the capacity. So with stabilizing operations, with continuing on the transformation and stop hiring of support staff; we are fully confident with the 1.2% increase of unit cost. Then on Page 13, you see the forward booking curve. So we are more or less in line with what we had last year so 75% of Q2 capacity is already sold on the long haul, the medium haul 65% and on Transavia 71%, slightly below. But we have an increase of capacity, don't forget that, of 10% to 15% and we see very strong yields in that market. On Page 14, you see the new hedge policy. So we are actually almost 70% hedged now. You will see that in Q2 the fuel cost will go up. So the fuel price has a negative impact of more than €100 million year-over-year. But we will expect with the current forward that Q3 and Q4 will be better in terms of fuel price. So fuel price is dropping. Jet fuel is actually expected to be $911 per metric ton in the market and especially the crack is coming down since the beginning of the year to levels of around $20 per barrel, which is a little bit what we have seen before COVID or especially before the Ukrainian war. So on Page 15, you see the outlook so it's a little bit boring. The group capacity, we reconfirm again the 5% versus 2023. The unit cost, we reconfirm the 1% to 2% growth with Q2 at plus 2%. And the net CapEx we reduced to safeguard our cash to €3 billion for the full year. With that, I hand over back to Ben.
Ben Smith: Okay. Thank you, Steven. So on Slide 17. As you all know, we're firmly committed to implementing an ambitious carbon footprint reduction roadmap based on three complementary pillars, which are: one, renewing our fleet with more fuel efficient aircraft; two, sourcing and using an increasing share of sustainable aviation fuels; and three, rolling out a series of operational measures positively impacting our operations both on the ground and in-flight such as eco-piloting. As I mentioned earlier, our fleet renewal program is progressing at a great pace. In 2023, we received 32 new generation aircraft and 2024 will mark a further pursuit with the expected delivery of 47 new generation aircraft. Between now and 2030, we will increase the share of latest generation aircraft in our fleet from around 20% in 2023 to over 80% resulting in a significant reduction in CO2 and noise emissions as well as a positive impact on our unit cost. Next fleet renewal, our sustainable aviation fuel strategy is fostering results with major customers partnering with us such as Airbus, which renewed its corporate staff contract last week. On Slide 18, as Steven said, the upcoming summer season will be dynamic as demonstrated by the encouraging level of forward bookings. All of our airlines are actively preparing to respond to this promising trend. With this in mind, we are continuing to reinforce our capacity, particularly in strategic geographical areas such as North America with both KLM and Air France. The key challenge this summer will be to ensure the highest possible levels of operational robustness across all segments from our fleet availability and readiness of our colleagues to airport infrastructure efficiency and reliability across all our bases. On to Slide 19. This summer season will be really special with the long-awaited 2024 Paris Olympic and Paralympic Games. Air France is honored to be an official partner of the games and all our teams are extremely excited in making this milestone a great success. Such a complex and large scale event requires an enormous deal of preparation to ensure a smooth and flawless operation for both athletes and visitors to Paris. We are expecting several traffic peaks. One before the games with the arrival of fans, sports delegations and media from all over the world converging on France and in Paris in particular. And two, toward the end of the games when fans, athletes and journalists will all be leaving over a very short period of time. We will also be transporting a significant amount of luggage and sports equipment 4x more than in normal summer as well as a greater volume of special equipment during the Paralympic games. To be able to take up the challenge, we have set up specific procedures to guarantee smooth operations for Olympic and Paralympic athletes and delegations along with all of our customers. We are working closely with Aéroport de Paris and the Paris 2024 Organizing Committee. One of the common projects includes building check-in infrastructures at the athletes village. At the airport, athletes and delegates will also be able to use a dedicated departure hall, which of course means other passengers can equally expect a smooth experience. From a capacity perspective, we are confident that our unique and diversified network will anchor its fundamental role in accommodating extensive international demand during the peak weeks of August and September. Paris will be the capital of the world for several weeks offering exceptional showcase and a unique opportunity to promote the Air France brand to visitors from all over the world. Moving on to the last slide. The first quarter was a challenging one with persistent geopolitical tensions, exceptional operational disruptions and the considerable headwinds curbing our cargo business. Nonetheless, our group again proved that we are resilient. And thanks to the collective effort of our colleagues, we managed to further increase our revenues, pursue capacity production and improve passenger yield. Looking ahead, we remain on track for a resilient trajectory over the coming quarters. We expect the summer season to be busy and all of our airlines are gearing up to ensure smooth operational deployment. This includes of course Transavia whose increased revenue and yield over the first quarter provides good momentum for a robust peak season. This leads us to feeling confident in our ability to achieve our midterm financial ambition. Thank you for your time and attention. We're now available to take your questions.
Operator: [Operator Instructions] We'll take our first question from Alex Irving with Bernstein. Your line is open. Please go ahead.
Alex Irving: Hi, good morning, gentlemen, and two from me, please. The first one on unit cost. Could you please outline the moving parts that will drive reduction in the pace of cost increases in Q3 and Q4 this year? Are we right to think about your target for those two quarters being basically flat unit cost ex fuel and what are the biggest risks to achieving this? My second question, can we please have an update on corporate travel? Some of your U.S. peers have been quite vocal about the recovery here. Are you seeing the same and where are you back to on a revenue and volume basis versus 2019, please?
Steven Zaat: Alex, just coming back on the unit cost. So if we look at the third and the fourth quarter, we of course grow further our capacity so that will drop further our unit cost. And you know that we had quite some disruption costs especially in Q4. So in Q4, we expect actually a unit cost reduction. In Q3, it is more or less the same as we will see in Q2, maybe slightly better, but more or less the same. So especially from Q4 with this capacity, we expect, let's say, stabilizing of our unit cost. And for the corporate travel, I give it to Ben.
Ben Smith: On the corporate travel side, we were at about 70% on average across all of our markets last year. I would say it's relatively stable on the medium-haul and long-haul markets, it's slightly and slowly moving upward. We're not seeing what the U.S. carriers are seeing domestically or what we're seeing in Europe. It is very solid, but it's really international which is moving slightly up in the premium cabins in particular, which is a great news for us in [indiscernible] outperformed our expectations.
Alex Irving: Thank you very much
Operator: Thank you. And we'll now move on to our next question from Stephen Furlong with Davy. Your line is open. Please go ahead.
Stephen Furlong: Good morning, gentlemen. Two for me. Ben, maybe just -- I'm just interested in getting your thoughts on the Commission's general I perceive a little bit more aggressively negative view on M&A or maybe they're just being more stringent in conditions. And I know your SAS deal is different, but just a general comment on that would be good. And then just for Steven, I'm right in saying that what's left in terms of the kind of hangover from COVID is that deferred social charges and wage taxes, it's about €500 million a year for the next three years, just confirm that. And just your general -- I know it's down the road, but how do you think about when you're asked about the hybrid capital in terms of what would you eventually do to exit that? Again I understand it's down the road. Thanks a lot.
Ben Smith: Stephen, commenting on the consolidation activity in Europe. So if we start with ITA and Lufthansa Group, it's quite complex this transaction I would imagine for the European Commission. Linate Airport in Milan very slot constrained and how to put in place remedies to ensure competition does not deteriorate I think is quite a challenge for ITA and for the Commission. That's at least our sense. I think that perhaps could be holding things up or slowing things down. We do strongly believe consolidation in Europe is a must, but for us we believe the fact that competitors' perspective will remain the same. And then with IAG and Air Europa in particular in Madrid, if that does go through the resulting market position in an airport that is not slot constrained and how you deal with that is also a concern. For us in Copenhagen and in Stockholm, the airports are open and the position that we'll be in, we will not be in a position of dominance. There'll be obviously some synergies that come out of it, but I don't think it's the same thing as Linate or the huge concentration that IAG and the combination of IAG Madrid. So I think they're unique transactions, I think difficult to find remedies. However, we do believe it's a good thing in Europe.
Steven Zaat: Thanks Ben. So on the social charges so at the end of the quarter, we are now at €1.6 billion. So we significantly reduced it from €2.3 billion. As you indicated, it's indeed €500 million per year so for '25 and '26 and then there is still €200 million to come in '27, which is related to the wage tax at KLM. But the impact is especially on '24, '25 and '26. On the hybrids, as you know, we are looking especially to support first our equity by net result. So we have to gain further improvement of net results in the coming period and then we will also readily pay off these hybrids by normal debt. So that is an irregular process and not something we will do in one shot and we need to support our equity to make sure that it is more stable than it was actually before the COVID crisis. So we are intending to reduce those hybrids in the years to come.
Ben Smith: And perhaps, Stephen, I can add one more thing on the consolidation challenges with the European Commission. ITA in terms of long-haul capacity is quite weak. The ability to or the necessity to maintain a balanced competitive network is difficult because a big portion of the Italian long-haul capacity market is traveling on a onestop basis. That's a new thing for the European Commission to have to figure out a way to keep things in check. Because if you look at the long-haul network today of ITA, it's not very extensive. However, they with Lufthansa's market position could direct a greater share of customers over the Lufthansa hubs, it'll be of a detriment of IAG. So that's the other aspect. I think on the medium haul point-to-point, standard type of remedies are relatively straightforward. It's the long haul that we're concerned and I think the European Commission has to find a way to ensure that there is a solution ensuring there's market stability and fairness.
Stephen Furlong: Very helpful, Ben. Thank you.
Ben Smith: Thanks Stephen.
Operator: Thank you. And we'll now move on to our next question from James Hollins with BNP Paribas (OTC:BNPQY). Your line is open. Please go ahead.
James Hollins: Yes. Thanks very much. Just three quick ones hopefully. Just any major labor agreements still to complete? I think you said you've done some millions anyway. Any more to still be done in key ones? And then the two follow-ups. I just wondering if you could give a little bit more I guess informal update on what you're seeing for some of those cargo demand and pricing trends into Q2. Obviously we're lapping some of the extraordinary revenue trends. And then the third one similar question on the MRO business. Obviously that seems to be doing well and you noted a few pieces there around some more third-party work. Just give us please an update on both as we look into the rest of the year? Thank you.
Ben Smith: Okay. James, so on the labor front at KLM, all the agreements, CLAs, have all been concluded so we don't have any pending agreements this year. At Air France, we have no open agreements. However, we have what we call categorical and active wage increase agreements and profit share. So the actual working conditions and the general agreements, as they're called here, we don't have any up for renewal. We did, those have all been signed. But we do have some smaller agreements that have to come up. One in particular is difficult, which is not directly in our control at all. In air traffic controller agreements, there was a potential big strike this week. The government did manage to find a compromise so we do not have to bear that. However, it was until the last minute so we did end up having to cancel about 1/3 of our program -- 1/2 of our program last week. So that did cost. But it appears that that risk has now been eliminated for the rest of the year. So that was one that obviously concerned us. And we don't -- I think what worries us the most and we don't have anything in particular that could directly hit our operation at the airport are perhaps other strikes in France that could make it more difficult for our staff to get to the airport could there be other public transport disruptions, that sort of thing. But as of today, we have small annual agreements that come up. The general overall of all ones have been in both major airlines and we don't have anything pending in Transavia.
Steven Zaat: And then on the cargo demand, that's always quite difficult to predict because the bookings are getting in more or less three weeks ahead. We expect still a slight drop in Q2 so we are quite cautious over there. And then in Q3 and Q4, we are actually normalizing the situation. So that is a little bit our view what we have currently, but I can tell you we have no booking in yet for Q4. I think nobody has. So this is really a short-term market where you can really see what yield and load factor are doing. Then on the MRO business, we have of course a better feel because we have long-term contracts. It depends always a bit when the engines come out of the shop because that will drive at that moment the revenue. But we expect a 20% growth year-over-year on our third-party business.
James Hollins: Great. Thanks a lot.
Operator: Thank you. We'll now take our next question from Jarrod Castle with UBS. Your line is open. Please go ahead.
Jarrod Castle: Great. Thank you. Good morning, everyone. Just thinking around the midterm, your objective is 7% to 8% margins I guess '24 to '26 and it doesn't look like it's going to be in '24. So what is the missing ingredient? Is it getting to the right cost base? Is it just the general health of the trading environment? And should we be thinking at the back end of this period really now? Secondly, you're separately disclosing Flying Blue. So I don't think you gave the pro forma from a year-ago, but any color on how profitability is developing and how you see that developing for the rest of the year would be very interesting. And then just lastly, I mean you highlighted more stage length from I guess Europe to Asia impacting yields on that. But are you seeing any intense competition from the Chinese airlines in terms of what they're doing on pricing? There's been some commentary that they're very aggressive on pricing so interested to get your thoughts on that. Thanks.
Ben Smith: Okay. So Jarrod, on attaining the 7% to 8% OI margin in the coming years, yes we're quite confident we can still reach that. Today, the major items that are holding us back, we are still having real challenge in getting KLM's production up to where we'd like it to be. So that is -- I think that's one of the biggest issues we have with KLM. We still have a shortage of maintenance personnel and we've still got challenges with training of our pilots under the right equipment. So we have a path to get that back to levels that are needed to get to that 7%, 8%. So that gives me some comfort that at least on the KLM side of our business, we're in pretty good shape. The CLAs that we have in place do address operationally the flexibility that we need. The cost structure of KLM, I don't believe it's gone above its major competitors in Europe with the increases that we put out and definitely nowhere near what we're seeing across the Atlantic in the U.S. Also we have a lot of new airplanes coming in so the unit cost of the new aircraft are significant especially on the medium haul with the Airbus A320neos, the Embraer 195-E2s and with the FSA 220s; they're exceeding our expectations in terms of unit cost reduction. So that's positive. And we are exiting a lot of unprofitable flying in particular at Air France with the reduction of our capacity at all the airports significantly and transferring that capacity that was flying on money-losing domestic routes out into the European market. That's another big saving and should contribute significantly. And then of course we're still doing a lot of optimization of the cabins. We've got a good 20, 25 long-haul airplanes still to go and that result in anywhere between 4% and 10% unit cost reduction for the airplanes that are impacted. So those are the high level items that give us confidence that we'll easily be able to reach that 7% to 8% OI margin in the midterm.
Steven Zaat: Jarrod, and then on the profitability of Fly Blue. So the profitability of flying is pretty stable so we expect more or less the same trend what we have seen in Q1 for the rest of the year. And then regarding your questions on China. So we have a partner, which is China Eastern, so we're working quite well together over there. There's still restricted capacity of Chinese carriers flying to France and the other way around. So in general we are working very well together, but we are different markets. So we are more having especially the European customer flying towards China and it's more the Chinese customers flying into Europe. So we talk a little bit of a different market set although we sell them here in Europe and they sell us in China.
Ben Smith: Jarrod, I have one more thing about the increase in our results over the midterm. Our joint venture with our biggest partner Delta across the Atlantic. We've recently evolved that joint venture to better reflect the market environment that we have today. It is a very successful joint venture we've had over years. And with all the new equipment that both airlines are bringing in, we are ahead of Delta. The strength of the U.S. dollar and the different economical situation in the U.K. versus the U.S. was not 100% optimal in terms of creation of value. So with the new agreement that we're putting out, it's much more realistic when you look at how it will impact us with the current environment and that should put us in a more stable and better position to share value with our two partners, which should help get us to that 7% or 8%. And then of course the Transatlantic is our most profitable market.
Jarrod Castle: Great. Thanks very much.
Operator: Thank you. And we'll now take our next question from Sathish of Citi. Your line is open. Please go ahead.
Sathish Sivakumar: I got two questions here. On the long haul bookings when you say 75% book, how does it actually compare to Transatlantic and Asia within that trend? Any color on that would be helpful. And in terms of cost side, obviously into the quarter 3, it is flat that the ground handling would be 4x higher because of the Olympic coming in. Does the cost side include any cost associated with volume dips into Q3? Those are my two questions. Sorry, quickly third one actually. On the €350 million bond that's up for refinancing this year, where are we on that? Any update on that would be also helpful. Thank you.
Ben Smith: Sathish, your first question didn't come through. There was a bit of a block or cut in the line. If you can just repeat your first question would be very helpful.
Sathish Sivakumar: Yes, sure. In terms of the long haul booking where you've shown the booking curve and you said 75%, but I just wanted to understand how does it actually compare between Transatlantic and Asia because you did flag that there is some sort of a weakness in Asia. I just wanted to understand how the booking curve looks in those two regions.
Ben Smith: Okay. So on the bookings, they're relatively in line. There's no big difference in any of our segments. So based on the historicals on how each region books in terms of the relative versus previous year, it's very similar. There's no material difference between that. There's no particular region that's an outlier.
Steven Zaat: And then on the repayment of the bonds so of course that is in our plan. We have very strong cash as you can see and of course we're always looking at the market opportunity to put a bond in the market. With the current credit rating, it's quite attractive. If you look at our spreads, they have significantly come down in December. So the market is there, but we have sufficient cash also to pay for it. That is not the issue at the moment. And we don't expect any additional cost for the Olympics in Q3. So there are no specific arrangements on ground or anything for that one.
Sathish Sivakumar: Okay, yes, thank you.
Operator: Thank you. And we'll take our next question from Harry Gowers with JPMorgan. Your line is open. Please go ahead.
Harry Gowers: Good morning, Ben and Steven. Two questions if I can. First one, just on the Q2. Maybe if you could give us some color on the pricing or the yields that you've seen in the month of April and directionally I mean where might you expect the Q2 group EBIT to come in or land? And then the second one, I mean have you seen any impact on bookings from the latest escalations in the Middle East or is it different to what we saw back in October? And I think you highlighted the Middle East yields in Q1 were down 10% year-over-year I think. So I mean would you expect some improvement in that going forward from here? Thanks a lot.
Steven Zaat: Harry, thanks for asking the question because actually I forgot to tell the pricing in April. So if you look at April, let's say, I have only the bookings in the first four weeks. So there's two or three days still not in, but it was quite good. It was more than 3% in terms of yield actual and the load factor was up 0.5%. So the bookings in April looking actually quite good and what of course helps is also that we have now stable operation at Schiphol. Then you know we don't guide on EBIT, also not on the second quarter, but we gave you the fuel. So the fuel is up more than €100 million year-over-year and we have given you the unit cost, which is up 2%. So it all depends on what the unit revenue will do. But for April, we see a quite strong yield. But for June and for May, even a little bit more difficult to say although bookings from May are quite positive also because it's the middle of all the holiday seasons in Europe.
Ben Smith: And then on the Middle East, things are moving back to historical volumes and yields relatively quickly on Tel Aviv and Beirut. Our three brands have either resumed or about to resume service to Tel Aviv and Beirut's been much more resilient over the last past few months. So there's a big visiting friends and relatives business, VFR, in particular between France and those two markets; business traffic has been relatively stable. So we're I would say cautiously optimistic that Tel Aviv and Beirut will come back to the levels that they were at prior to October. It's a bit different in the leisure markets of Southern Egypt and in Jordan, that's still not back not close to where we were before October. So we've redeployed a big portion of that capacity to other markets. And luckily we've got -- for Transavia, we have a lot of opportunity in the Northern African countries of Morocco, Algeria and Tunisia. So that's at least been able to maintain our forecast for Transavia. But if we're just particularly looking at Egypt and Jordan, still below where we were prior to the uncertainty of the incidents in October. So I think Middle East to be seen overall, but Tel Aviv and Beirut, quite pleased with those.
Harry Gowers: Very clear. Thanks a lot, Ben.
Operator: And we'll now take our next question from Andrew Lobbenberg with Barclays. Your line is open. Please go ahead.
Andrew Lobbenberg: Can we talk a little bit about Transavia? It obviously had really nice unit revenues in that March quarter, but just wondering how much of that was down to Easter timing? And then looking forwards, how much benefit are you expecting from the introduction of the wheely bag fee because that obviously gave a huge injection of unit revenues to the pan-European locos since they bought that in? And then can I come back to TAP Portugal where we're awaiting development. I think I've seen some stuff in the press with you, Ben, saying that you're still very interested in the project and yet as you discussed earlier in this call, the EU Competition Authorities are being very attentive to a competitive overlap and it would seem to me that you guys have quite a bit of competitive overlap in that market. So do you still think it's realistic that you could have a run at it as and when the privatization comes? Thanks.
Ben Smith: Okay. Andrew, so Transavia's performance, as you know, we're transitioning a lot of Air France capacity over to Transavia so that has a transitional period, which we predicted. But in terms of the performance and how our forecast relates to reality, we're quite pleased. Transavia is doing slightly better than we had expected for Q1 and the outlook for the rest of the year is exactly where we thought in our budget so happy with that. The bag fee is actually doing better than we had planned. It's always tough to forecast what the take-up would be. So that's very, very strong. And Portugal, it's still a bit early. I mean we always knew that when you got a very slot-constrained airport like Lisbon that the potential remedies would be high and we've got a good idea on what is necessary for the business case to make sense. And then of course there's all be the unquantifiable value of having a strategically located hub in Western Europe. But that's not stopping us from expanding our partnership with GOL. We still have the exclusive partnership with GOL on the other side of the South Atlantic to ensure that we can maintain our number two position behind IAG on the Southern Transatlantic. So we have other plans ready to or ensuring that we can maintain our position in case such a transaction would not happen, too difficult for us or it took a long time. So we're still interested. We're following very closely the ITA file and we'll see how Madrid goes. So you're right, things may be more difficult, but it's a bit early to tell.
Andrew Lobbenberg: And just while you mentioned GOL as a defense, I mean is your partnership with GOL -- would it endure as GOL or if GOL moves into Abra and it emerges with Azul and there's an awful lot going on in M&A and strategic developments in Brazil, right?
Ben Smith: Yes, correct. So right now the relationship is very solid. It's a long-term relationship. We still have taken a very, very small investment of what GOL, I don't know if we can evaluate anything. But now with the management team and with Abra, it's quite solid. As you know, it doesn't -- just because the parent companies with one alliance and the partner companies with one alliance does not mean you could have something a little different with another alliance. So our routes are the three cities that we serve in Brazil. So Fortaleza is very strong, we're increasing capacity by about 40% for this summer. Sao Paulo and Rio are stronger than they were in 2019 so we're really happy with that. So we have a very good position. There are other opportunities to start nonstop service into Brazil. Even if we don't have a partner on that end, our reach in Europe is very strong. And if you look, you know like our geographical position of France and the Netherlands, our two hubs, are a much better situated to capture greater share of the European market versus the Lufthansa Group.
Andrew Lobbenberg: Great. Thank you.
Operator: [Operator Instructions] And we'll now take our next question from Johannes Braun with Stifel. Your line is open. Please go ahead.
Johannes Braun: Yes, thank you for taking my questions. Two for me. Firstly, those €610 million of pension funding that you had in Q1, any more background why it became necessary and also whether there's more to come in future quarters or years? And secondly, any comments on how yields are trending beyond Q2? So into the peak season I guess, also against the backdrop of the Olympic Games. Thank you.
Steven Zaat: Johannes, good to hear you. The €610 million was actually we didn't pay any pension premium to the CAPM during the COVID crisis. So that ended to July 2023 and then we had an agreement with the pilots that we should pay that back in January '24. So that is €610 million, which is a one-off which we always showed to the market that we still have deferred payments in social charges and pension premiums. And then on yields so we see strong yields in April. I think May will also be good and for June, et cetera, this is quite difficult to say. But for April the first four weeks, it was up more than 3% excluding a rate of exchange impact.
Johannes Braun: And anything on the summer on Q3?
Steven Zaat: Yes, that's very difficult to say. We don't have all the bookings yet and the revenue management game is always in the plate in the last three weeks. So it's very difficult to say at this moment. We see stronger month, but to say what is the exact yield is too difficult to say at the moment.
Johannes Braun: All right. Thank you.
Operator: And we have a follow-up question from Conor Dwyer with Morgan Stanley. Your line is open. Please go ahead.
Conor Dwyer: Hi, guys. Just a clarification question for myself. Just on the slide, it shows that the book load factors heading into Q2 are down about one percentage point, but I think you indicated for April load factors were up slightly. So I'm just wondering is there an indication that people are booking a bit later and if so, will you expect a bit of a pricing benefit from that with the later fares or are you having to discount it all in the load book revenue? Thanks.
Ben Smith: Conor, the differences are so small, we don't see any material change in booking trends.
Conor Dwyer: Thanks.
Operator: Thank you. That was our last question. Gentlemen, I give the floor back to you for the conclusion. Thank you.
Ben Smith: Okay. Well, thanks to everyone for joining this morning and we look forward to seeing you on the next call. Have a great day.
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