Air France-KLM: Undermined by the impact of the Olympic Games, Air France-KLM disappoints and falls on the stock market

(BFM Bourse) – The air transport group generated revenues in line with consensus in the third quarter but its operating profit was lower than expected. Air France-KLM saw its unit revenue be weighed down by the Olympic Games while its costs were increased by tensions at KLM.

If the summer of 2024 offered a great showcase for Air France-KLM, largely involved in the transport of passengers for the Paris Olympic Games, the air transport group was not spared from headwinds.

This resulted in accounts generally lower than expected in the third quarter and a stock market sanction. Around 10:00 a.m., Air France-KLM plunged by 10.3%, showing the biggest drop in the SBF 120.

From July to the end of September, the Franco-Dutch company generated revenues of 8.98 billion euros, up 3.8% year-on-year, excluding currency effects.

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Costs that have slipped

Air France-KLM saw its unit revenue (i.e. to simplify the revenue per passenger) per available seat-kilometer contract by 0.6% over the period. Air France-KLM explained that its unit revenue had been penalized to the tune of 160 million euros by the impact of the Paris Olympic Games, i.e. in the mid-range of its previously indicated forecasts (150 million to 170 million euros). euros).

Air France-KLM had warned at the beginning of July that it was suffering from “pressure” on its unit revenue due to the Olympic Games. Traffic to and from Paris was lower than expected, due to “significant avoidance behavior” of the Paris capital in international markets, while the French postponed their vacations until after the Olympic period.

Unit costs increased by 3.4%, more than the forecast of 2% that the company delivered to the market last July, after the presentation of its half-year results. Air France, during the period, made an exceptional payment of 50 million euros to its staff due to “good operational performance” during the Olympic Games. But that surcharge was baked into the company's 2% forecast.

“The additional 1.4 points of unit cost are the consequence of difficult summer operations, mainly at KLM and Transavia, having led to a significant disruption cost (65 million euros), including the impact of the outage linked to Crowdstrike (25 million euros) and lower capacity at Transavia (-3%),” explains Air France-KLM. The “Crowdstrike outage” refers to a giant computer outage that occurred in July and which temporarily grounded a very large part of air traffic.

Costs increased particularly at KLM in the third quarter due to salary increases but also difficulties in the maintenance activity, where the company is facing shortages of technicians and supply tensions for spare parts.

Restore KLM’s profitability

In October, KLM launched a package of measures to structurally reduce its costs, so as to improve its operating profit by 450 million euros in the short term.

Due to these higher costs, Air France-KLM's profitability indicators have declined over one year. Gross operating profit (Ebitda) fell 10% to 1.896 billion euros while operating profit stood at 1.18 billion, falling 32% year-on-year.

“Operating profit was significantly impacted by the Paris Olympics, affecting Air France as previously announced. On KLM's side, cost challenges exceeded expectations, putting pressure on certain aspects of its business model and strengthening the need for structural improvement at all levels. These measures are part of the group's ongoing transformation efforts, aimed at sustainably improving overall performance,” explained Ben Smith, CEO of Air France-KLM, quoted. in a press release.

Lowered outlook

Ultimately, if revenues come out in line with expectations, Ebitda and operating profit disappoint. According to a consensus posted online by the company, analysts on average expected a turnover of 8.887 billion euros, an Ebitda of 1.913 billion euros and an operating profit of 1.2316 billion euros .

The company's net profit also fell by 16% to 780 million euros.

Regarding its outlook for 2024, Air France-KLM indicated that it expects capacities (the number of routes put into service) to increase by 4% this year compared to 2023, compared to 5% previously.

The company has mainly revised its unit cost increase projection upwards, counting on an increase of around 3%, compared to around 2% previously, due to higher than expected costs in the third quarter.

UBS judges that both these prospects and the stronger-than-expected increase in unit costs in the third quarter are likely to weigh on the stock.

Air France-KLM also indicated that the increase in the solidarity tax on plane tickets, provided for in the Finance bill for 2025, would result in an increase in the “tax” of 280 million euros and a negative impact on operating income of 90 million euros to 170 million euros.

Julien Marion – ©2024 BFM Bourse