Introduction to Finance Air France - KLM Financial Analysis. Before reading I chose Air France as a company to analyze it financially-speaking. But, as my major is in economy in ENPC, I will also include strategic information in this report. I based the financial accounting on the data provided by Yahoo! Finance, which are the three statements, back to March 31, 2007 for the oldest report base. I also reviewed some of other companies in the same business line, especially for main indicators (EBIT, ROC, ROA, P/E... ). It will be mentioned when done so. . Introduction Air France-KLM is one of the major airline companies, and results of the merge of Air France and KLM in 2005. As for any other company in this business line, it has been toughly hit by increasing price of oil, (especially peak prices of summer 2008) followed by global economic recession from fall 2008, that made many stock prices plunge. Add to this the fierce competition of the other low-cost airlines such as easyJet or RyanAir, operating from Ireland and its attractive taxes, and the competition with Gulf companies.
These companies entered the increasing market and draw to them an important share of the new and former customers, forcing former major companies to vied with them by betting on quality of attendance, diversification of services (such as short and long transporters, cargo transport, maintenance services). Since a few months, AF-KLM also provides charter flights to compete with low-cost ones, but still betting on the quality. A specific point for this kind of industry is the importance of the alliance : AF-KLM is a member of the SkyTeam with fifteen other airlines, whose main competitor is Star Alliance (n°1).
Their networking’s quality and density is one of the main key for their international strategic development. But Air France is still recovering from 2008 crisis, that hit it especially in 2009-2010. 2. Financial Analysis Let’s see some details about financial statements, annotated (quick answers to third question) | 1. Profitability |Rate of return on assets / owner’s equity ? | | | | |Return On Equity |-9. 0% |Negative. Means profitability problems. | | | | |Actual share prices & eurocrisis accounts | | | | |for this. | | |How expensive is company’s stock ? |(Mr31, 2011) |Low (we’d expect 10 to 15). But it’s | | | |5. 3 |underrated now, because of crisis. | | |Price / Earnings | | | | |What has been the dividend ? | |This is a very good dividend yield, but it | | |Dividend Yield |0. 21 |is 6-month dated. | |2. Liquidity |Enough cash to meet current obligations ? |Degradation from 2006 years (competition? ), | | |Working Capital |€-1,83M |risky. | | |Accounts receivable well-managed ? | | | | |Current Ratio |0. 7 |Poorly, due to liquidity crisis. But credit | | |Quick Ratio |0. |lines available. We can expect better | | | | |afterwards. | |3. Fin. Structure |Debt Ratio |0. 85 |Pretty good, valuable assets | | |Debt-to-Equity |171. 1% |Seems bad, but normal for business line, | | |Total Liabilities/Total Assets |77. % |(high needs). | |4. Asset Mgmt |Inventory Turnover |34. 2% |Good. Shows previous good management. | | |Total Assets Turnover |0. 9 | | |5. Various |EBITDA Margin |6. 17% |Acceptable. | | |Return On Assets |-0. 9% |Compared to 2007 years, low, but in this | | |Return On Capital |-0. 47% |time and with other airlines, OK. | a. Is Air France-KLM doing well ? What do you think ? After catastrophic results in March 31, 2009- March 31, 2010, with a loss in the EBIT of €1,3B, due mainly to crisis and other factors detailed before, the company recovered for the next period, with a positive EBIT of €122M. This dramatic change has been made because revenues made a 13%-increase of 2. B€, and a big program, called Challenge 2012, has been launch to curb the structural expenses. This accounted for €600M of savings. This important move took place in a very uncertain international context : after Icelandic volcano paralysis, American snow tempests, Arabic revolutions and the Japanese disaster, coupled with still raising oil prices, the year was very uncertain. Still, the three core activities (passengers, maintenance, cargo) have improved their results, and the group made benefits in 2010-2011.
Because of an insurance’s policy against fuel price increase, started in 2005, €2. 5B were won so far, though the last two exercises have been negative for this (a positive figure in the next one is expected). Besides, and this is quite lucky, the IPO of Amadeus (AF had shares in it) turned out to be very profitable (AF-KLM made €200M of cash flow out of it). The FCF at March 31, 2011 was €400M, and the Debt Ratio decreased, from 115% to 85%. The group also ensured itself against fluctuations in interest rates, because all the debt has fixed interests.
The 2011-2014 objective of AF-KLM is to reach a ROCE of 8%, and their plan is: 1. A 1%-decrease per year of production unit costs to stay competitive 2. Control the investments and pick carefully them. 3. Keep curbing the debt to make it less than stockholder’s equity. According to AF-KLM 2010-2011 report, the company was in terrible health last year and the recovery is doing well, although it could be stronger. The AF stock price has fallen from 14 to 4. 26 in one year, a fall which amounts to 69. 24% in a year.
But for the fiscal year of 2010/2011, the net income was a rough €613M. So, for the structure, Air France-KLM is improving, diminishing its debt ratio from year to year. The Free Cash Flow remained the same during the years, to €3,7M. Gross profit is still lower than before the crisis (€1200M), but positive, at €886M, compared to €-1600M of former year. b. Do accompanying notes tell a different story ? Accompanying notes underlines the importance of structural ratios that guarantee healthy accounts of Air France, though it is hard to call Air France-KLM “safe and sound” right now.
Some ratios can help us ensure that AF is quite resistant : 10% free cash flow (of the assets), good debt ratio trend, solid dividend yield and P/E last exercise, to draw trust from investors to them, asset management acceptable. But you have to take into account the context, very difficult, and how Air France dramatically recovered from 2009-2010 exercise. Besides, fierce competition and expansive kerosene makes it harder. Air France clearly has liquidity problem, the working capital being negative, and return on equity to, but compared with other airlines of eurozone (Lufthansa, Iberia... it is pretty much the same. Notes underlines this point of view, and especially talk about projects in the future, and unstopped growth of Air France, with strategic merge with KLM. Recently, due to financial problems of Air France and the will of M. Pinetta to go back closer to the company’s operations, he appointed a new CEO, M. De Juniac, that will implement in the first moments many changes (as it is often made in big companies which are changing of CEO). I saw two of them : 1.
Cutting costs and reducing the number of employees, as Air France’s new CEO will announce in January his program, which is likely to destruct jobs, or curb salaries, coupled with a savings policy to cope with financial problems of Air France-KLM. 2. Launching new strategic hubs & prices to compete with low-cost companies (RyanAir, easyJet). Air France tends now to fight its low-cost competitors with low-priced flights local stations (one in Toulouse, one in Nice), and sell from €50-ticket the flight. Quality service is included, which makes the difference with others. Rendez-vous next March 31, to see Air France improvements (or not ? )...