3 operating margin when Air FranceKLM is 4

To blow the candles of the anniversary, a huge cake had been planned. More than 900 million euros of annual profits at the end of the 2005-2006 fiscal year. Two years after the effective merger between Air France and KLM, the new leader in air displays his good health and an operating income increase of 69 over the previous year to 936 million. Evolution may seem paradoxical that all airlines must cope with soaring oil prices. For Exane BNP Paribas, is only proof that "the strategy of Air France-KLM, based on profitable growth, works perfectly.

Profitable growth The formula makes sense when comparing the group to his immediate following, British Airways. Since 2000, faced with the growing burden of debt and competition of the "low cost" companies, the British will is required on a severe diet. "Income fell 20 from March 2001 to March 2004 and, in parallel, the Group has launched several cost reduction plans," said an analyst of a Parisian Bank.

The formula has achieved its objectives: in 2004 - 2005, for the second year of suite, British Airways is is stated as the most cost-effective of the large European companies with a 8.3 operating margin when Air France-KLM is 4.4 and German Lufthansa to 3.2. The Dutch group took a completely opposite path. "He chose the more risky approach but potentially more profitable consisting, on the contrary, to increase its capacity (7 and 6 for only two years), in particular on the long-range over-water, to take advantage of the growing demand for air transport," note a sector specialist.

In this, the marriage of Air France and KLM has been of great value as it enabled "combine and rationalise two networks." "The Group offers the largest number of destinations (110, against 81 for British Airways) and frequency", adds Yann Derocles, analyst at Oddo Securities. Operation seduction is even more easier than the Group has, with Roissy (Paris) and Schipol (Amsterdam), "single hub in Europe to be able to take advantage of the growth in demand by 2009", according to Exane. With its four runways, the airport Charles-de-Gaulle is figure of child spoiled from the two runways of Heathrow in London. Same concern for Lufthansa in Frankfurt, where the construction of a fourth runway met the opposition of environmentalists.

Profitable destinations

This strategy has allowed Air France to assert itself as the first European company: with 69.2 million passengers in 2005, the Group transported 35 more people than Lufthansa, its immediate prosecution. Above all, Air France-KLM manages to make this volume effect. First with a geographically diverse passenger traffic. It has the advantage of having "38 of its long-haul destinations served by British Airways or Lufthansa, which offered him a significant pricing power", said Oddo. With its wider frequency range, the company is gaining market share from the very income-generating business classes, which represent 30 of our passengers but 50 of our net sales", said Philippe Calavia, Chief Financial Officer of Air France-KLM. Result: revenue per seat, a key to the sector index, now have a positive ( 1.5 in 2004-2005, 1.6 in 2004-2005 and 2.9 in 2003-2004). "The trend followed by the income proves the success of the expansion of the network," said Deutsche Bank.

Problem: the markets still have difficulty to this conclusion. After 42 in six months, until April, Air France-KLM has a little help of blues on the stock market since a few weeks, by accusing a withdrawal of 7.4 since early 2006. Especially the title is still undervalued compared to its peers, is negotiating "with an enterprise value equivalent to four times the gross surplus of operation before leasing (Ebitdar) of 2007, against 4.5 times to 4.6 times for the rest of the sector", note Yan Derocles at Oddo.

The kerosene factor

The oil factor is passed by this: If the price of a barrel had fallen around 55 dollars end of 2005, currently operating in close low of $ 70. The issues of costs therefore tend to take on those related to growth. "Air France-KLM must demonstrate its jurisdiction in the matter," noted an analyst of a French Bank.

To deal with the important of black gold, the airlines have several tools. First, fuel loads to the ticket price, frequently used in recent months. "Our net sales grew by 10 last year, of which 3 to 4 due to these overloads", noted Philippe Calavia. For a Parisian analyst, the latter "were allowed to transfer more than 60 of the increases in the course of the crude to the client but in the long term, it is difficult to abuse."

The companies have other assets in their channel, including the covers of their oil needs on the futures markets. At this game, Air France-KLM has excelled over its competitors: last year, 85 of the needs of the company were covered at 39 dollars per barrel of crude, against 59 dollars on the market. By comparison, those British Airways were covered for 81 to $ 45 per barrel. "The aftermath of this success, it is that, on a comparable, Air France-KLM suffer more than others this year as its cover becomes less effective and that prices remain high," said JP Morgan, which relies on a decrease in operating income. "Fake", argues Philippe Calavia. "Our coverage remains more effective than that of our competitors" with 77 of needs covered at 50 dollars a barrel, against 54 to 57 dollars for British Airways.

The construction of productivity

The fuel Bill should, nevertheless, to add $ 1 billion this year. Programs out of oil cost reductions therefore appropriate for the company. "Markets underestimate the potential of cost synergies related to the merger," observes Morgan Stanley. The Group has just meet these synergies by 36 to 670 million by 2008-2009. Finally, "programs launched by Air France and KLM cost savings will help generate 326 million of savings," said Oddo. In the sights of the analysts, the personnel expenses, higher as a percentage of revenues (more than 31) in Air France-KLM as its competitors. "The improvement of the productivity is a critical site," provides Philippe Calavia. The company said able to benefit from a workforce ( 2 between 2006 and 2009) and stability agreement with all categories of staff to restrict the increase in wages to inflation. Finally to coax investors on its ability to better utilize its resources, the company was a target of return on capital employed (Roce) of 7 by 2009, against 5.2 currently. Without great result on the title for the moment. Markets await the results of the first half to try on parts.