Subdued performance of Air France, operating losses eating away shareholders equity and mounting debt aggravates concern

Air France-KLM offers air transportation services. The company operates airlines and offers travel booking, freight transportation, aircraft maintenance, catering and pilot training services.

Revenue remained flat; reduction in annual operating losses and latest quarter operating income jumping three-fold

As per the latest reported annual results, Air France-KLM reported flat revenue growth, with revenues of Euro 25.5 billion in the fiscal year 2013, as compared to Euro 26.3 billion for the fiscal year ended 2012. At the operating level, the company continues to make losses for 3 consecutive years in a row; however the magnitude of losses has been contained, with reported operating loss of Euro 227 million in fiscal year 2013 as compared to an operating loss of Euro 880 million in fiscal year 2012.

Latest quarter results ending June 2014 on the revenue front mirrored the corresponding quarter last year, with revenues of Euro 6.45 billion as against Euro 6.54 billion for the quarter ending June 2013. However, it is worth mentioning that the company clocked in an operating income of Euro 238 million, which is almost 3x of what it achieved during the quarter ending June 2013.

Consequently, the company’s operating margin improved dramatically from 1.28% from second quarter 2013 to 3.69% in second quarter 2014.

Higher tax payments magnified net losses; non-dividend paying company

Despite lower operating losses in fiscal year 2013, the company’s EPS dropped to negative Euro 6.17 in fiscal year 2013, as compared to negative Euro 4.03 in fiscal year 2012, largely on account of higher income tax expense (FY2013: Euro 957 million, FY2012: Euro 27 million). However, the company posted negative EPS of only Euro 0.02 for quarter ended June 2014 as against negative EPS of Euro 0.53 for the corresponding quarter last year, pretty much in line with the expansion in operating margin.

Annual net losses restrict the company in following an active dividend policy and therefore Air France-KLM continues as a non-dividend paying company.

Market consensus

As per the market consensus, the company is expected to grow marginally at the revenue and net income front which is more or less aligned with the latest annual results witnessing a flat growth. The surprising element is that consensus is building in a dividend pay-out policy which is likely to augur well for the shareholders. Further, EPS is expected to grow faster than the revenues, signalling noticeable expansion in margins. The table below displays market expectations for Air France-KLM in terms of its financial performance:


Absolute debt number reduces, however depleting shareholders equity is an area of concern leading to alarming debt ratios

Company’s long term debt stood at Euro 8.59 billion as of December 2013, a reduction of Euro 969 million from December 2012. However, due to continuing net losses the company equity is depleting and this has resulted in Long-Term Debt/Equity ratio bloating to 3.8x as of December 2013, as compared to 1.9x as of December 2012. Company’s capital structure seems more vulnerable as of quarter ended June 2014 with Long-Term Debt/Equity ratio mounting to 7.6 times.

Upcoming events

The Company is expected to 1) declare August 2014 traffic figures on 8 September 2014, 2) perform 2020 Investor Day on 11 September 2014, 3) be at Goodbody Aviation Investor Day on 23 September 2014, 4) declare September 2014 traffic figures on 8 October 2014, and 5) announce its 3rd quarterly results on 29 October 2014.

Major shareholders

Following are 3 major shareholders of company:

  • Government of France 15.88% holding with 46.66m shares
  • Air France-KLM Employees 7.00% holding with 21.02m shares
  • Capital World Investors 5.24% holding with 15.74m shares

    Significant change in shareholding

    Following are the major shareholding transactions that took place recently:

  • Capital World Investors buying 15.74 million shares
  • Edmond de Rothschild Asset Management selling 6.10 million shares

    Consecutive three year losses has dented stock price performance


    Source: Reuters