Search This Blog

Thursday, 28 July 2011

Air France-KLM suffers unexpectedly large loss in Q1 and blames it on increased fuel costs; I blame it on the lack of a healthy earnings model in the aviation business.

Only one month ago, Air France-KLM was in the news with a slick, marketing-driven story on the usage of cooking oil for fueling air planes.

Interested readers can read this again via my article: McDonalds proudly presents: the “McPlane”.

Today, however, Air France-KLM was bitten by reality, while presenting their  Q1-figures for 2011-2012 (AF-K has a financial year not coinciding with the calender year).

The company has beaten the negative expections, by presenting a net loss of €197 mln for Q1, 2011. The Dutch financial newspaper Het Financieele Dagblad writes on this story. Here are the pertinent snips:

Aviation company Air France-KLM suffered an unexpectedly large loss, during the first quarter of book year 2011-2012. The French- Dutch company closed the quarter off with a net loss of €197 mln, according to the quarterly results, issued on Wednesday. That result was  much lower than market expectation.
Air France-KLM states to have suffered from the strongly increased fuel prices. Those fuel prices soared by 16%, during this period that ended on June, 30th. Therefore the company’s kerosene bill increased by €232 mln.
Also the political unrest in Africa and the Middle-East and the nuclear disaster in Japan added to the aviation company’s bad results. These developments led to an additional loss of €100 mln.
The average analysts’  forecast stated that Air France-KLM would suffer a Q1-loss of €64 mln. In comparison: exactly one year ago, the aviation company enjoyed a net profit of €736, due to a one-off book profit of €1 bln.
The operational result was also negative: €145 mln. One year ago, that was €132 mln negative. Sales amounted to €6.22 bln: an increase of 9%, but almost €100 mln less than analysts expected.
The branch ‘Passenger-traffic ‘ saw sales increase by 10%, but was ultimately bearing a loss, with a gross revenue (ebit) of -/- €140 mln. Also ‘cargo’ was bearing a loss (-/- €14 mln against +€11 mln one year before), while sales slightly increased. The ‘maintenance’ branch, traditionally the most profitable area of the company, did add to the company’s result.
For calender year 2011, the company aims at a positive operating income.
The first thing that comes into my mind is: what were those well-rewarded analysts doing, when they missed the target for KLM by more than 200%.

The second thing is: when the company is bearing a substantial loss for Q1, bookyear 2011-2012 and the company had been bearing a loss of €264 (without the one-off book profit) for Q1, last year, there is ample reason for being worried.

And even more worrisome are the reasons for this loss, stated by Air France-KLM, that seemed to be ‘cut-and-pasted’ from the IATA’s Profit Outlook of June 2011 (see the link below in this article).

Yes, there have been unrest in the Middle-East and Africa. And yes, fuel became much more expensive. And yes, airlines are more vulnerable to shifts in fuel-prices, due to the excessive fuel consumption of airplanes. But one should remember, that fuel prices for airplanes are still without any taxes, in contrary to every other means of transport in the world, that must pay taxes on its fuel costs.

And Japan, the Middle-East and Africa were substantial problems, like the volcanoes were last year. But where these the kinds of problems that could bring a truly healthy company to its knees? Asking the question is answering it. And you might ask yourself: when will Air France-KLM write black figures  again? And will it ever?

In my opinion, this is a very relevant question.

And of course we had our share of setbacks in 2010 and 2011, thus lowering the profitability of the airliners: the ash cloud from the Icelandic volcano, the societal acrimony in North-Africa and Arabia, the earthquake and tsunami in Japan and the high oil prices that were the results of it. But hey, these are normal business risks and a healthy industry wouldn’t hardly notice those.

My opinion is that there is something structurally wrong within the aviation industry. When an industry has had a net return of 0.1% over the last forty years and when sustainable profitability for the aviation industry is still a mirage, like it is today, then you could seriously question the earnings model for the whole industry.
Especially when you consider that aircraft fuel – the main driver for aviation costs – is still free of taxes, due to an international agreement, where ALL other kinds of fuel for cars, trucks and other means of transport are (heavily) taxed by governments all over the world: gasoline, diesel/gasoil, LPG (Liquified Petroleum Gas) or fuel oil for ships.

You cannot see this loose from the development of passenger aviation over the last 20 years. Passenger aviation turned from a high-priced, high quality and high-service means of transport for the rich elite into a low-budget, mass transport medium that carries billions of people per year for bottom prices under – in some cases – poor circumstances.

The industry did this by slashing the ticket prices and stashing as many people as possible into an aircraft, while looking for maximization of the utilization rate of the airplane, by letting it fly almost around the clock. The relatively small group business class flyers pay – objectively looking – for the race to the bottom for economy class-passengers.
This race to the bottom was triggered by price-fighters like Easyjet and Ryanair in Europe, but was soon taken over by the established aviation companies. This is not a sustainable development, as in the end something's got to give.

What the figures make perfectly clear is that flying is almost considered an excuse for the existence of Schiphol. Although the figures of Schiphol Group are not totally clear about this, it is a well-known fact that aviation is in reality an unprofitable activity for Schiphol.  But of course it is an indispensable condition for having an airport and due to tax-free kerosene and other tax-breaks, aviation can be executed at a very small loss. But the real money makers are consumers, participations and CRE.
In my opinion, the whole aviation and airport industry suffers currently from a fatally flawed and structurally unprofitable business model.

The industry is busy with an enduring battle for the cheapest tickets and an utilisation rate of airplanes that comes close to 99%, while on the other hand surprising the customers with all kinds of hidden charges and fees, up to (sometimes) 300% of the net ticket price.

This battle will last until the last airliner standing…. And I guess, it will only be a matter of time, until the first aviation company does fall over. And I wouldn’t even be surprised, if this leads to a domino effect of dropping companies in the whole aviation industry.

Seen in this light, Air France-KLM is not at all the worst operated airliner in the world. The company is big and strong and has especially favourable operating rights and a large network all over the world, compared to other airliners.

But the company needs to make serious money: not by asking hidden fees and extra charges from unknowing passengers, but by calculating a fair and square ticket price, without hidden tricks. A price that is sufficient for a net return of at least 10-15% of sales, instead of the 0.1% that seems to be the IATA standard.

However, before this will happen for Air France-KLM, some other airliners have to disappear first.

No comments:

Post a Comment