Air France - Klm S.A.: Long-Term Financial Analysis

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Air France-KLM has a fleet of more than 571 aircraft, which includes passenger and cargo transport planes (Reuters, 2015). Air France-KLM also has a lucrative rewards program amongst its subsidiaries, Air France and KLM, called ‘Flying Blue’ (Reuters, 2015).

Although the above-mentioned aspects were very positive for the company, there has been negativity surrounding Air France-KLM as of late, most notably with the Paris terror attacks. In addition to this, Air France-KLM has been in the news recently, which has portrayed them in an extremely negative light. In early October 2015, Air France executives were assaulted after approximately 100 employees stormed their offices after hearing about job cuts planned for the near future (Carraud & Altmeyer, 2015). These negative news stories, combined with the news of the Paris terror attacks have poorly affected Air France-KLM.

Competitors

To analyze the investment potential of Air France-KLM, a thorough quantitative and qualitative analysis must be conducted and industry benchmarks must be created. This report compares Air France-KLM’s eight main competitors, which all offer passenger transport as the main source of revenue (Marketline, 2015a). Air France-KLM’s major competitors include; Deutsche Lufthansa AG, Qantas Airways Limited, International Consolidated Airlines Group S.A., Air Canada, Air New Zealand Limited, Ryanair Holdings Public Limited Company, EasyJet PLC, and Air Berlin PLC. Creating an industry benchmark with companies such as these who offer the same services as Air France-KLM will allow for us to critically analyze Air France-KLM against its peers.

Deutsche Lufthansa AG

Deutsche Lufthansa AG is a large provider of passenger transportation in the world, offering both domestic flights within Europe and international flights to several continents. Deutsche Lufthansa AG also offers cargo transportation, maintenance, and logistics within the airline industry (Marketline, 2015b). Deutsche Lufthansa AG and Air France-KLM both offer passenger transport as their primary source of revenue and each offers the same additional services as one another. Both companies also employ a similar number of employees and have revenue figures that are close to one another (within $6 billion USD). It is important to compare Air France-KLM with Deutsche Lufthansa AG because of the close similarities of each other. This will allow us to assess the investment potential within the industry especially when comparing to such a close competitor.

FINANCIAL ANALYSIS OF AIR FRANCE-KLM

When analyzing whether or not to invest long-term with a specific company, arguably the most important thing to consider is their financial health. Included below is an analysis of Air France-KLM’s profitability, operations, liquidity and solvency, cash flow and share valuation. We have taken ratios in each of these categories and compared them to Air France-KLM’s largest competitor, Deutsche Lufthansa AG, as well as compared them to the industry benchmark. The industry average was comprised of the ratios of companies listed above under the competitors heading. When looking at these comparisons, if Air France-KLM has a significant advantage or disadvantage relative to industry averages and close competitors, it will help with our decision of whether or not to recommend a long-term investment.

Profitability

One of the most important aspects of a company’s financial health is its profitability. This is typically the first thing investors look at when trying to decide whether or not to invest their money and it often carries the most weight among other aspects of a potential investee. Included below will be an analysis of the profitability of Air France-KLM, Deutsche Lufthansa AG, and the industry averages. The ratios taken into account are profit margin and return-on-equity (ROE), both of which are expressed as a percentage.

Net Profit Margin

Net profit margin measures the percentage of a company’s revenue that is made up of its profits. It is calculated by dividing a company’s net profit by total revenue. Air France-KLM had a net profit margin of 0.23, -2.52, and -4.39 in 2014, 2013, and 2012 respectively (Bureau van Dijk, 2015). When looking at Deutsche Lufthansa AG, their profit margins were 0.58, 1.76, and 4.07 in the same years as the above ratios (Bureau van Dijk, 2015). We also see that across the same years, the industry average for net profit margin was 4.61, -0.23, and 2.43, respectively (Bureau van Dijk, 2015). In every single year, Air France-KLM had a lower ratio than its closest competitor, Deutsche Lufthansa AG, and the industry as a whole. Although this does not necessarily signify that Air France-KLM is not financial stable, it is a strong indicator of the volatility within the company and industry as a whole.

Return-on-equity (ROE)

Return on Equity (ROE) is a profitability ratio, which measures the company’s ability to generate profit using its shareholder’s equity. ROE is calculated by dividing net income by the total shareholders’ equity. Air France-KLM had an ROE of -31.33%, -79.78% and -33.68%, respectively in the years 2014, 2013 and 2012 (Bureau van Dijk, 2015). Deutsche Lufthansa AG had an ROE of 1.36%, 5.12%, and 25.38% during the years 2014, 2013 and 2012, respectively (Bureau van Dijk, 2015). The industry benchmark was 7.97 in 2014, 13.32 in 2013, and 1.62 in 2012 as per Table 2 in Appendix 1. Air France-KLM is incurring a much lower ROE than both the industry benchmark and Deutsche Lufthansa AG; they are incurring a negative ROE because of the net loss. Since Air France-KLM has been incurring a negative ROE over the past five years, the value that shareholders have invested in the company has been diminishing. This is not good for an established company, which has been profitable in the past.

Operational Ratio

The operation ratio is used to measure the operational efficiency of the management, calculated as a percentage (Accounting Management, 2015). The smaller the ratio, the greater profit the company can produce if revenues were to decrease. Operation ratio is calculated by dividing operating expense by net sales. Air France-KLM had an operation ratio of 0.44, 0.45, and 0.47 in the years 2014, 2013 and 2012, respectively (Bureau van Dijk, 2015). Deutsche Lufthansa AG had an operation ratio of 0.42, 0.43, and 0.41 in the years 2014, 2013 and 2012, respectively (Bureau van Dijk, 2015). The industry benchmark was 0.6 in 2014, 0.58 in 2013, and 0.58