Air France-KLM Sees Annual Profit on Transatlantic Revival

(Bloomberg) --

Air France-KLM expects a return to profitability for the full year and is adding transatlantic seats as an easing of travel rules revives prospects for the struggling carrier.

The shares jumped after the airline group reported positive free cash flow in the third quarter and said it’s offering 70% to 75% of 2019 network capacity during the final three months of the year. That will exceed the 66% achieved in the July-to-September period. 

“The bookings are coming in much better than we expected,” Chief Financial Officer Steven Zaat said in an analyst briefing. “We are prepared to ramp up more if needed.”

While the carrier declined to provide an outlook for 2022 because of uncertainty about the reopening of most Asian countries, it said demand during the summer high season was above expectations. Europe eased border curbs during that time and vaccinations emboldened governments to relax restrictions. The U.S. is set to reciprocate starting Nov. 8. 

Air France-KLM shares surged as much as 6.1% and were up 5.8% as of 9:09 a.m. in Paris. That narrowed their loss this year to 19%.

The update is the latest sign the aviation industry may be finally through the worst of the crisis brought on by the coronavirus pandemic, which grounded much of air travel for the best part of 18 months. Air France-KLM only survived thanks to massive state aid from shareholders France and the Netherlands, though the full opening of crucial routes between Europe and the U.S. starting next month could provide the basis for a sustainable recovery.   

Third-quarter earnings before interest, taxes, depreciation and amortization of 796 million euros ($930 million) were positive for the first time since the pandemic began and beat estimates compiled by Bloomberg. The airline expects the figure to be positive in the fourth quarter and slightly positive for the year.

‘Success Story’

Air France-KLM saw a surge in ticket purchases for short and medium-haul flights over the summer as well as for long-haul destinations, which account for about three quarters of profit margins, Zaat said. 

“We’re building up capacity to the U.S. and plan to be at around 90% of the 2019 offer at the end of winter season,” he said on a call. Demand to the U.S. is strong and the long-haul business in the third-quarter “was quite a success story.”

What Bloomberg Intelligence says: 

High net debt and investment needs mean the company may use the more stable travel outlook and cash flows as a cue to go ahead with further balance-sheet action. That could include another rights issue.

-- Conroy Gaynor, BI consumer, aviation analyst

Nevertheless, talks are ongoing between the Dutch government and the European Commission for a further recapitalization package, Zaat said. The carrier is also readying more capital-strengthening measures that could include a rights issue and quasi equity instruments, according to the statement. 

“We are prepared for it, but we are looking for the right conditions,” he said. “We have no liquidity crisis at this company.”

Air France-KLM is in “deep discussions” with manufacturers for a narrow-body jet order, Zaat said, declining to provide any details about when a decision will be reached. Both Airbus SE and U.S rival Boeing Co. are going head to head to win the deal. 

The carrier’s 10.4 billion euros of available liquidity and credit lines “can be considered sufficient, given the continuation of recovery throughout the summer,” the airline said.

Earnings Highlights

• Third-quarter Ebitda 796 million euros versus -442 million euros
• Net debt was 8.1 billion euros at September 30, down 2.9 billion euros from end of 2020
• Net quarterly loss narrowed to 192 million euros from 1.7 billion euros
• Adj. operating free cash flow reached 278 million euros

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