AirFrance KLM Financial Year 2009-10 First Quarter

Despite this difficult environment, the group benefits from a high level of liquidity of 5.7  billion euros including 1.2 billion euros in credit facilities. During the quarter, Air France-KLM had a successful 661 million euro convertible bond issue, while on 28th July, KLM extended the term of its 530 million euro credit facility from July 2010 to July 2012, with the possibility of a further prolongation to July 2013.

Quarter to 30th June 30th In euro millions 2009 2008

Change 2008 published Revenues 5,169 6,505 (20.5%) 6,288 EBITDAR 112 814 (86.2%) 816

Operating income/(loss) (496) 201 nm 234

Income/(loss) from operating activities (496) 217 nm 251

Pretax income/(loss) of consolidated companies (612) 211 nm 251

Net income/(loss), group share (426) 149 nm 168

Restated net income/(loss)2 (431) 132 nm nm

Earnings/(loss) per share (1.45) 0.54 nm 0.57

Diluted earnings/(loss) per share (1.45) 0.51 nm 0.54

The group’s results do not include its 25% holding in Alitalia, which will be integrated by the equity method as of the Second Quarter on the basis of the previous quarter’s results. Alitalia reported its First Half results in line with its budget. These results are encouraging in the context of the difficult trading environment currently experienced by the airline industry.

Passenger activity in the quarter April to June 2009 remained weak with a 5.8% decline in traffic. A 4.7% reduction in capacity limited the decline in the load factor to 0.9 points at 79.4%. As in previous months, the decline in premium class unit revenues was particularly pronounced, while in economy class they proved more resilient. In total, unit revenues per available seat kilometre (RASK) fell 14.8%. Revenues of the passenger division fell 18.7% to 4.01 billion euros. Despite a reduction in capacity of 17.2%, cargo suffered a sharp decline in traffic of 22.7%, and a drop in unit revenues per transported tonne kilometer of 25%. Revenues for the period declined 41.5% to 547 million euros.

Despite a 7.1% reduction in production measured in equivalent available seat kilometers (EASK), unit cost per EASK was down 3.9% and was stable on a constant currency and fuel price basis, and excluding the impact of the additional pension fund charge. Operating costs declined 10.1% to 5.66 billion euros. Excluding fuel they dropped 6.4% thanks to the 148 million euros in costs savings realised under the ‘Challenge 12’ programme. Reductions in operating costs were achieved in all areas:

• The fuel bill declined by 329 million euros to 1.14 billion (-22.5%) under the combined effect of a 10% decline in volume, a negative currency impact of 15% and a drop in fuel prices limited to 27% by the hedging effect.

• Employee costs were down 1.3% to 1.9 billion euros. Excluding an additional 34 million euro charge to the Air France and KLM pension funds, the decline would have been 3.1%, in line with a 1.9% reduction in headcount (106,800 at 30th June 2009 versus 108,800 at 30th June 2008 proforma).

• Distribution and other costs declined 19.5% and 16.2% respectively.

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The operating loss stood at 244 million euros excluding the negative impact of the fue hedges of 252 million euros (-496 million euros after the impact of the hedges, compared with income of 201 million euros at 30^th June 2008). The adjusted operating loss1 was 434 million euros at 30th June 2009 against income of 256 million euros a year earlier.

The operating loss excluding fuel hedges breaks down as follows:

- Passenger activity: -141 million euros (-338 million euros including the fuel hedge impact).

- Cargo activity: -253 million euros (-197 million euros including the fuel hedge impact).

- Other activities: +20 million euros (+9 million euros including the fuel hedge impact).

- Maintenance: +30 million euros.

The net interest charges rose 11 million euros to 56 million due to lower financial income, while the cost of gross debt was stable. Other financial income and costs amounted to a negative 60 million euros, including a positive currency result of 43 million euros and a negative impact of relating to the change in fair value of hedging instruments of 102 million euros. After a tax credit of 195 million euros and a negative contribution from associates of 10 million euros, the net loss amounted to 426 million euros against income of 149 million a year earlier. Net loss per share and diluted net loss per share both stood at 1.45 euros against earnings per share and diluted earnings per share of 0.54 euros and 0.51 euros per share respectively at 30th June 2008.

Investments net of disposals amounted to 133 million euros at 30th June 2009 (478 million at 30th June 2008). Cash flow was a negative 271 million euros of which 97 million euros relating to derivative instruments not classified as hedges. The change in working capital requirement was a negative 102 million euros. The group’s financial position remains strong with cash of 4.5 billion euros and available credit lines of 1.2 billion euros. Shareholders’ funds amounted to 6.10 billion euros, up 407 million euros versus 31st March 2009, with the negative impact of the fair valuation of hedging instruments down from 1.5 billion euros to 0.73 billion euros during this period. Net debt stood at 4.81 billion euros (4.44 billion at 31st March 2009). The gearing ratio1  was stable at 0.79 versus 0.78 at 31 March 2009.

We have continued to adapt to the economic environment. A further 5% annualised reduction in cargo capacity is planned for the Winter season, with the grounding of four full freighters, taking to 10 aircraft the reduction in the cargo fleet since the start of the crisis. The group is also undertaking a review of the medium-haul network, both in terms of  destinations and products, and the outcome of this process will be implemented at the beginning of 2010. At the same time, we continue to adapt our employee headcount to current levels of activity. If the scenario of a stabilisation in the global economy, followed by a gradual recovery at the end of 2009 is confirmed, the trend in unit revenues could be as follows: - In the passenger business, a further deterioration in the Second Quarter, albeit at a slower pace than in the First; a stabilisation in the Second Half relative to the Second Half of 2008-09 which was already impacted by the crisis. - In cargo, a continuation of the current trend followed by a progressive stabilisation in the Second Half.

(c) Centre for Asia Pacific Aviation. Date posted: 31-Jul-09