Should not invite him: Air France-KLM

First of all, if you don’t care about the stock market like your first ULM but a neighbor, a teacher or a great-uncle forced you to read this article, you can pretend and have fun by finding eight more songs or less aerial in this paper (including two in the introduction and one in two pieces. Solutions at the bottom of the page).

Even if it is based purely on personal intuition, I have the impression that the airline industry has the palm of the sector which suffered the most calamities of the 21st century, at least until today. Risks linked to attacks, risks linked to the pandemic, risks linked to geopolitics, risks linked to climate change. And even the volcanic risk (Eyjafjöll, 2010). And I am not talking about endogenous structural risks, such as the cyclicality of the activity or the competition between low-cost carriers and incumbent companies.

In the midst of all this, the original companies like Air France, KLM, British Airways (International Consolidated Airlines) or Deutsche Lufthansa are not having it easy. And Air France-KLM, a bit like an airplane without wings, less than the others. Moreover, it will probably take three years (2020, 2021 and 2022) to generate profits again, where its historic rivals will only need two years to take off again.

But why is the Franco-Dutch group lagging behind in the sector?

A bit of history to start. Air France and KLM operated until their merger in 2003/2004 as independent companies. The two carriers were created between the wars. Air France has long evolved into the public fold until the opening of the capital by the Jospin government in 1999, which coincided with the company’s listing on the stock market. The actual privatization only took place during the merger with KLM, when the Raffarin government agreed to reduce state ownership from 54.4 to 44%. Currently, France holds 28.6% of the capital of the Air France-KLM group, ahead of China Eastern Airlines (9.6%), the Netherlands (9.3%) and Delta Air Lines (5.8%). This new distribution takes into account the fundraising carried out since the start of the pandemic, to keep the company on track.

A brand new B787 (Air France photo library)

In the recent aviation world, Air France is synonymous with strikes and / or delays worthy of Alice’s white rabbit. And KLM of Batavian rigor. It’s reductive, but that’s how it is. Air France has always been a political animal with strong salary representations. The Dutch branch is not without social friction, but the corporate culture is a little different. The presence of a high public shareholder base tends to frighten investors, especially Anglo-Saxons. Especially since it has increased recently. In 2017, the French State held only 14.3% of the capital and the Dutch State was not present in the capital. Four years later, the two states therefore together own 38% of the round table, through the play of recapitalizations and The Hague’s desire not to let Paris take too much influence.

I love you, neither do I

Because relations between Air France and KLM are not always simple, almost 18 years after their marriage of convenience. In particular because the Dutch component is more profitable than the French component. There has never been extensive integration, so significant disparities remain and the group has the highest fixed cost base in the sector according to analysts. Which obviously makes it more sensitive to all the fluctuations I mentioned above. The ups and downs of financial performance, complicated social negotiations and repeated fundraising explain why Air France-KLM only appears at the 16e rank of Western airlines in terms of capitalization, when it was 5e worldwide in revenue in 2019, according to Airline Business.

The divorce between the company and the markets is not new, but it has become more pronounced in recent times, as the following graph illustrates.

Three years of ordeal

The years of return to profits (2015 to 2019) did not allow a return to the prices reached just before the subprime crisis, eight to nine times higher than current levels. With margins lower than the competition, a return to profitability, the presence of two countries in the capital and XXL debt, nothing to immediately foresee a wild night on the stock market for investors. Analysts are in tune: Air France-KLM is at the bottom of the current recommendation “charts”, with an abysmal buying advice / selling advice ratio.

Results that fluctuate (group EBIT over 10 years)

Results that fluctuate (group EBIT over 10 years / Source Zonebourse)

Some positive elements anyway to end with a pirouette. In reality, Air France-KLM is rather a company well regarded by passengers. A ranking carried out by UBS shows that the French company is ranked 7e European rank out of 19 on a multi-criteria satisfaction analysis, for a 4e up to the Dutch division. The two hubs at Roissy and Schiphol are modern and well placed. And the fleet is being modernized, with a recent order for 100 large jets, from the A320 family (in reality these are medium jets, but I needed a big jet for the musical challenge).

“Should not invite him” identifies rather qualitative companies going through a complicated stock market pass (or moderately qualitative, you will probably retort in the case of Air France-KLM, which seems to be going peanut). You never know, they could get over it! The latest articles in the section:

And the list of songs that had to be found:

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