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Air France - KLM (OTC:AFLYY) is the result of the 2004 merger of Air France and KLM Royal Dutch Airlines. The company has the highest airline revenues in Europe in terms of Revenue Passenger Miles and 27% of the revenue share of the Association of European Airlines.[1] Operating with hubs out of Amsterdam and Paris, the company offers flights to 62% of the total Long-Haul destinations offered from European airlines.

Corporate Overview

Business & Financial Metrics[2]

In 2009, Air France incurred a net loss of €1.54 billion on revenues of €21.00 billion. This represents a 101.7% spike in net loss on a 12.4% decrease in revenues from 2008, when the company lost €765 million on €23.98 billion in revenues.

State Support

Although the French State sold its majority share in Air France KLM, it still owns 17.9% of the shares available and commands 18.0% of the voting rights for the company.[3] Furthermore, the French and Dutch governments have signed an agreement of mutual understanding as to the importance that Schiphol and Charles de Gaulle (Paris) Airports have for Air France - KLM and thereby agreed to consult with each other on regulation changes and developments.[4]

The company itself claims that French and Dutch State support for its business is limited, citing the coverage for excess damages that the United States government offers airlines. [5] However, Ryanair Holdings (RYAAY) filed a claim in February 2008 that the Dutch Government's decision to exempt transit flights from environmental taxes was made in order to benefit Air France - KLM. [6]

Business Segments[7]

Air France - KLM divides its business into Passenger Transport, Cargo Transport, Maintenance, and Other. Furthermore, it divides its Passenger and Cargo segments into Long-Haul and Medium-Haul segments.

  • Passenger Transportation (70.0% of sales): This segment transports 73.5 million passengers to 240 destinations each year.[8]
  1. The Medium - Haul Flights network includes Europe and North Africa and serves 122 destinations in 36 countries. It also serves as a connector between those destinations and the Long - Haul flights, to which 65% and 52% of customers transfer in Amsterdam and Paris respectively.[9]
  2. The Long - Haul Flights network consists of all destinations outside of Europe and North Africa. It carried 22.2 million passengers to 118 destinations in 69 countries, of which only one-third are served both by KLM and Air France.[10]
  • Cargo Transportation (10.0% of sales): Excluding those companies that are solely cargo transporters, Air France - KLM is the largest cargo company in Europe in terms of scheduled freight tons. The company sees difficulty in developing its cargo transportation business due to increasingly developed sea transportation, increased cost due to fuel prices, and the difficulty of maintaining balance between Asia and Europe (where the cargo export:import ratio is 8:1). [11]
  • Maintenance (12.0% of sales): Air France - KLM provides maintenance for 900 aircraft that belong to over 150 different airlines.[12]
  • Other Activities (3.6% of sales):
  1. The KLM Charter Business primarily sells charter flights but the company is repositioning it as a travel agent and it is opening in France as a 60% owned subsidiary of Air France. [13]

Currency Exchange Rates

Air France - KLM conducts many of its purchases in foreign currencies, specifically in the US Dollar. In 2007, the company's costs less revenues in the USD were approximately $2.8 billion. As a result, as the dollar falls in value against the Euro, the company's costs also fall; however, if the dollar increases in value against the Euro, the company's costs increase. The company attempts to reduce the risk of currency fluctuations by hedging the currencies that it holds. [14]

Competition

Although Air France - KLM's primary competitors vary based on the routes which it serving, over 60% of the company's revenue comes from customers in Europe. From hubs in Paris and Amsterdam, Air France - KLM offers 111, or 62% of the 178 Long Haul destinations offered from Europe. The company's two main competitors are:

  • Lufthansa and its acquisition Swiss International Airways are based out of hubs in Munich, Frankfurt, and Zurich, and serve 42% of the 178 Long-Haul destinations.
  • British Airways is based out of its hub in London Heathrow and serves 48% of the 178 Long-Haul destinations.[15]

Although there are a variety of low-cost and budget airlines that provide each route, the higher per unit revenues of business class fliers are generally reserved for a larger airlines.[16]

Other competitors include the thirty three members of the Association of European Airlines, of which Air France - KLM has a 27% revenue market share.[17]

References

  1. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 28
  2. AFLYY 2009 10-K pg. 2  
  3. AFLYY 2007 SEC Filing 20-F, Item 7, Pg. 114
  4. AFLYY 2007 SEC Filing 20-F, Item 3, Pg. 10
  5. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 3
  6. Reuters
  7. AFLYY 2009 10-K pg. 25  
  8. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 28
  9. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 31
  10. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 30
  11. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 36
  12. AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 38
  13. [http://www.sec.gov/Archives/ed

    Key Trends and Forces

    Consolidation

    The merger of Air France and KLM was one of the first major mergers in the airline industry. Although Delta and Northwestern are planning to merge and talks have been underway between a number of different airlines in the United States, Air France - KLM have already been able to benefit from a merger. The company estimates that in 2007, their merger secured €67.1 million in additional revenue and €29.6 million in fewer costs. Since their merger, the companies estimate having a combined benefit from the merger of €342.7 million. The company continues to look for ways to reduce costs and has targeted a unit cost reduction of €1.4 billion or 3% of per unit cost by the end of 2010.<ref> [http://www.sec.gov/Archives/edgar/data/1110452/000119312507151600/d20f.htm AFLYY 2007 SEC Filing 20-F, Item 5, Pg. 65]</li> <li id="_note-11">[[#_ref-11|↑]] [http://www.sec.gov/Archives/edgar/data/1110452/000119312507151600/d20f.htm AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 13]</li> <li id="_note-12">[[#_ref-12|↑]] [http://www.sec.gov/Archives/edgar/data/1110452/000119312507151600/d20f.htm AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 26]</li> <li id="_note-13">[[#_ref-13|↑]] [http://www.sec.gov/Archives/edgar/data/1110452/000119312507151600/d20f.htm AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 26]</li> <li id="_note-14">[[#_ref-14|↑]]

    [http://www.sec.gov/Archives/edgar/data/1110452/000119312507151600/d20f.htm AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 13]</li></ol></ref>
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