TOP CONTRIBUTORS

Scott Myers

AFLYY AT A GLANCE

 

 

 

 

 

 

Air France - KLM (OTC:AFLYY) is the result of the 2004 merger of Air France and KLM Royal Dutch Airlines. With operating revenues of €23.1 billion, it 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.

The company has additional revenues of €342.7 million as a result synergies related to its 2004 merger. It has also been artificially insulated from increasing fuel prices by securing 78% of its fuel at prices between $70 and $80 per barrel. However, these advantages over other airlines will not hold for long as airline consolidation becomes a trend and the fuel hedging contracts expire in March 2009. ^[2] The company does not receive the state-supported increased insurance coverage that airlines in the US benefit from; however, France and the Netherlands signed an agreement to recognize the importance of their airports for the company and to consult each other on regulation changes and airport restrictions.^[3]The French State remains a 17.9% shareholder in the company.^[4]

Corporate Overview

In 2006 and 2007, unit cost decreased and unit revenue increased, leading to an increase in revenues and operating income.

^[5]

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.^[6] 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.^[7]

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. ^[8] 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. ^[9]

Business segments

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.

2007 Revenue by Segment^[10]

2007 Revenue by Geographical Point of Sale ^[11]

2007 Passenger Revenue by Geographical Destination ^[12]

• Passenger Transportation (80% of sales) represents €18.4 billion or 80% of total sales revenue and an 8.6% increase from the previous year's €17.0 billion in revenue. In 2007, Air France - KLM transported 73.5 million passengers to 240 destinations.^[13]

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. It carried 51.3 million people in 2007, an increase of 4.9% from the previous year, and earned €7.1 billion in operating revenue.^[14]
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. It earned revenues of €10.3 billion in 2007, an 11.4% increase since 2006.^[15]

• Cargo Transportation (12.6% 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. In 2007, it carried 1.4 billion tons of cargo and had €2.9 billion in revenues from its cargo shipping business, a 0.9% increase from 2006. 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). ^[16]

1. Medium - Haul Flights account for only €75.4 million, or 2.6% of cargo revenue because most cargo transport within Europe is more cost effectively done by trucks, ships, or trains. The longer distances of long - haul flights make air transit more attractive for shippers.^[17]
2. Long - Haul Flights account for €2.84 billion, or 97.8%, of cargo revenue. 40% of this revenue is cargo between Europe and the Americas and 46% is between Asia and Europe.^[18]

• Maintenance (4.0% of sales): Air France - KLM provides maintenance for 900 aircraft that belong to over 150 different airlines. This segment is responsible for €2.9 billion in revenues, although only €977 million of those revenues are from external companies. The segment also earned €44 million in operating income in 2007, a drop of €10 million the €54 million contributed in 2006.^[19]
• Other Activities (3.6% of sales):

1. The KLM Charter Business, which is primarily operated through the website Transavia, had revenues of €584 million and €35 million in operating income in 2007. Although the service primarily sells charter flights, the company is repositioning it as a travel agent and it is opening in France as a 60% owned subsidiary of Air France. ^[20]
2. Catering is operated by fully owned Servair and KLM Catering Service and provides catered meals to Air France, KLM, and other airlines. It earned €739 million in 2007, a 4.1% increase from the €710 million earned in 2006.
3. The Sky-Team Alliance lets customers to collect points on other Airlines including Delta-Northwest, and Aeroflot which they can redeem for flights on any other Sky-Team members.

Key Trends and Forces

Fuel Costs

After the cost of labor, the cost of jet fuel is the second highest cost for Air France - KLM and represents 19.5% of the company's operating expenses, two percent more than in the previous years. ^[21] The company has, however, secured 78% of its fuel until March 2009 at prices between $70 - $80 per barrel. The airlines' European competitors Lufthansa and British Airways secured 83% and 72% of their fuel requirements at lower rates as well; however, Austrian, Iberian, and Lingus Airways all secured less than 50% of their fuel at lower prices. The only American airline to secure more than 50% of its fuel through similar options is Southwest Airways. ^[22]

After March 2009; however, Air France - KLM's fuel contracts will have to be renewed and will almost certainly be at higher prices. In order to face the pressures that increasing fuel prices have caused, the company added a new fuel surcharge in March 2008 and is investing approximately $1 billion per year in more fuel efficient aircraft.^[23]

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.^[24]

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. ^[25]

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.^[26]

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.^[27]

Other competitors include the thirty three members of the Association of European Airlines, of which Air France - KLM has a 27% revenue market share. In 2006, more than 343 million passengers traveled through this area, a 4.5% increase in number of passengers as well as a capacity increase of 4.4% and a traffic increase of 5.2%.^[28]

References

1. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 28
2. ↑ AFLYY 2007 SEC Filing 20-F, Item 5, Pg. 65
3. ↑ AFLYY 2007 SEC Filing 20-F, Item 3, Pg. 10
4. ↑ AFLYY 2007 SEC Filing 20-F, Item 7, Pg. 114
5. ↑ 2007 Annual Report
6. ↑ AFLYY 2007 SEC Filing 20-F, Item 7, Pg. 114
7. ↑ AFLYY 2007 SEC Filing 20-F, Item 3, Pg. 10
8. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 3
9. ↑ Reuters
10. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 28
11. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 30
12. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 29
13. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 28
14. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 31
15. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 30
16. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 36
17. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 36
18. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 36
19. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 38
20. ↑ AFLYY 2007 SEC Filing 20-F, Item 4, Pg. 40
21. ↑ AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 9
22. ↑ New York Times
23. ↑ New York Times
24. ↑ AFLYY 2007 SEC Filing 20-F, Item 5, Pg. 65
25. ↑ AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 13
26. ↑ AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 26
27. ↑ AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 26
28. ↑ AFLYY 2007 SEC Filing 20-F, Item 1, Pg. 13