Air France-KLM S.A.

Alexandre de Juniac - Chairman and CEO Pierre-Francois Riolacci - CFO

Oliver Sleath - Barclays Capital Damian Brewer - RBC Andrew Lobbenberg - HSBC Andrew Light - Citigroup

Ladies and gentlemen, thank you very much for coming this morning. Thank you for those who are connected through the telephone or Internet.

Welcome for this first half 2015 results that we will present; Pierre-Francois Riolacci and I. We will divide our presentation into two parts.

First of all, Pierre-Francois will comment on the figures and I will, after him, make a quick update on where we are in terms of the roll-out of Perform and about our strategy. So, Pierre-Francois, you have the floor to start with the comments on numbers.

Thank you, Alexandre. Good morning to all of you.

I will jump right away into the presentation and invite you on the phone to look at page 3 and start with some highlights. We had actually a mixed environment.

On the economic side, it was not too bad and, definitely, North America is doing well, supported by the strong US dollar; no surprise. Most of the economies in which we operate are stable and we have, however, some issues.

One is Brazil, which is definitely not recovering and we have no sign of improvement in Brazil. And also, more generally, the oil and gas routes which are under pressure [physically] in each country which is very much dependent upon oil price.

You see a significant decline in demand. On the political side, there was again some heavy turmoils.

Definitely the North Africa is a tough area and it has mainly Transavia. But also Japan has not recovered and the traffic between Japan and Europe has not recovered from what happened in the beginning of the year.

The good news is that the Ebola impact is now fading away and in June it was even difficult to find any track of further disruptions linked to Ebola. We had high volatility in fuel price and also in ForEx, and now you definitely need to look at both unit revenue development in nominal -- in current terms but also excluding [indiscernible].

You need to look both to give you an idea during -- if you look just at the unit revenue for the passenger business, it was up plus 2.2% in the second quarter or it was plus 1% in Q1. And excluding [ROCEs] it's down 4.8% where it was down 2.3%, so you see a really different [trend] and that's, I think, an important [indiscernible].

However, during -- despite this environment, we had some significant achievements on the strategy and the restructuring on Transavia and I think Alexandre will elaborate on that. One which is very important for me, as you can imagine, is the cash generation and the debt reduction which has been achieved during this second quarter and [indiscernible] during the first half of the year.

If you look at the key data, you see that revenues during the Q2 are up 3% and down 4.5%, excluding ROCEs, so there is a clear downturn between Q1 and Q2 in the unit revenue, excluding ForEx. The ForEx impact in the quarter is EUR500 million for the revenues; significant negative ForEx impact on the operating KPIs.

[Indiscernible] a sure advantage is clearly handled over to our customers for unit revenue decrease. The debt is down to EUR4,550 million despite a negative ForEx impact, despite some operating [indiscernible] that we have decided to move back in the balance sheet, and this is on the back of very strong cash generation, nearly EUR300 million, plus a financial operation that we have completed during this first half of the year.

About ForEx, you know that we [indiscernible] 25% of the revenues which are denominated in US dollars. Another 25% denominated in different currencies; [JBP], Japanese yen, Chinese yuan, etc., but we have also 42% of our costs which are denominated in US dollars, mainly fuel but also [indiscernible].

So if you look at what happened during the second quarter, we had a positive impact on the revenues for EUR507 million, mainly impacts, but also in [MRO] and cargo, accelerating from Q1 due to higher volumes also because the tickets which are now being accounted in revenues has been actually issued in Q4/Q1 where the US dollar started to increase so it's pushing up. But we had also, in the same time, a very significant ForEx impact on the cost; EUR561 million, mainly on fuel.

If you look at the different segments, I think that I will elaborate on each of them. You see that [PACS] operating result is flat on the PACS business in like-for-like, excluding ForEx.

I think that you see that all the [other] operations are more or less stable or even definitely improving, like maintenance. The key issue for us during this quarter was cargo where we've had a very tough environment.

We'll elaborate a bit more on that. On the PACS side, you see that we maintain a very strong capacity discipline with ASKs up 0.4%; I will detail that a bit.

The unit revenue is up 2.2%. You see the impact of the ForEx, which is very significant, and I will again detail per region the different trends.

You see also that the [France cabin] is doing a bit better than the eco with unit revenue in premium down 3.5% where unit revenue in eco is down 5.8%. One word about the CASK, which is up 3.3% and there you see again the impact of the US dollar.

Excluding ForEx, it's down 4.9% and you can see here the impact of the fuel price. About capacity, you see that on the last three quarters we've been very, very disciplined with stable capacity even negative in Q4.

You see also that the trend -- definitely deteriorating but, again, there is clearly a shift between the value in the ROCEs and the valuation of the unit revenue, excluding the ROCEs. If you look at the map -- the overall map, on long haul first, you see an increase during the quarter of the ASKs of 1.4% where the unit revenue is down by 5.5%, excluding ROCs.

What is above the average definitely Caribbean and Indian Ocean, which are doing very well, but [Technical Difficulty] that this minus [Technical Difficulty] we are shifting obviously our sales towards the US market and we [accept] to sell at the lower yield in the US market so it has a negative impact on the unit revenue, excluding ROCEs, but, of course, it's still a good bargain because we benefit from the strong US dollar. For the rest, you see the consequences of other supply, especially in South America where the unit revenue is down nearly 14%.

This is pretty much on the back of Brazil. The rest of the continent is doing okay with the exception of Columbia so it's definitely a Brazilian issue and we will have to take actions to limit the negative impact of this weak demand.

On Asia/Africa, you see that unit revenue is down minus 6%/minus 7%, excluding ROCEs. You see again the issue of [over-supply] and the Gulf carriers but also the weak market in Japan, which is [helping] us, and also the political unrest that we have in East Africa and the oil and gas routes, which are very important, in Western and Central Africa.

One point which is worth to be noted is the medium-haul point-to-point business where we are carrying on the restructuring of the networks. Minus 14% of ASKs and you see that it is [indiscernible] on the unit revenue, plus 8% on the back of the [indiscernible] but also because we are doing a lot of efforts which are paying off in terms of marketing.

On cargo I mentioned that it was a tough quarter, definitely. We have been moving ahead with the restructuring.

The full-freighter capacity is down 26%, quarter to quarter in one year's time. Including the [indiscernible], the capacity on cargo is minus 5.7%.

The unit revenue is down 4% and even minus 14% excluding ForEx. You may remember that a few months ago we had some pick-up in the demand in Europe; we've seen that vanishing in the air and today's demand in Europe is pretty idle.

On top of that, we have some competitors -- full-freighter competitors which are not basically hedging their fuel so they have the capacity to transfer to the market, faster than the usual operators, the lower fuel price and probably it is accelerating the trend; hopefully it will stop a bit earlier than for the rest of the business. The good news is on the cost of the unit cost which is down 8.5%, excluding ROCEs, excluding -- but with fuel.

The good news is that excluding fuel, excluding ROCEs, we still maintain a decrease in the unit cost for about 2% which, in the context of decreasing capacity, is quite an achievement. The top priority of our new management is definitely to execute the restructuring of Schiphol.

It's done in Charles de Gaulle. It has to -- it's still being done in Schiphol; and also to focus the organization on efficiency and including the revenues and notably the load factor.

After cargo, maintenance is definitely much brighter. Basically, everything is good in maintenance on this quarter.

Third party revenues are booming with obviously the booster of the ForEx. But even excluding ForEx, we have a strong double-digit growth in external revenues in [E&M] with an order book which is further increasing.

For [indiscernible] we will present you the order book in US dollar because if it was in euro it would be including even much more and you know it is a dollar business. The improvement in the ForEx is also helping in the margins because we are 30% above costs which are still in euros, so definitely a well-oriented business.

I'm not saying that we'll do the same one in the full -- in the next quarters but we expect a good year in E&M; that's for sure. On Transavia, if you look at the global story, we have capacity which are up by seven -- [ASK] up by close to 9%.

You need to look [difference] to Netherlands and France. In Netherlands, we carry on shifting the model [Technical Difficulty] business to a [pure low-cost] model.

We are moving on. ASK down 2% because of the switch.

The unit revenue is more or less stable and the unit cost is slightly down, 2%; that's adjusted and excluding fuel. You remember that Transavia Netherlands had a tough beginning of the year last year.

It's getting better; it's fixed. And they have also signed the [CNA], which is very encouraging and which paves the way for further growth in Transavia Netherlands; that's really good news.

On Transavia France, it's a very different story. You know that we are increasing lots of capacity; plus 22% during the quarter, and we delivered this increasing capacity.

It was tough; in unit revenue they've [indiscernible] in the second quarter. Of course, the low-cost market is competitive, especially on the source of Europe, in Spain and Italy.

But what was really difficult was North Africa, as Alexandre mentioned, because North Africa accounts for more than 35% of the market of Transavia France, especially Tunisia and Morocco, and Tunisia has been badly hit by the events that occurred earlier this year. So unit revenue [indiscernible] adjusted is down 13% during the second quarter.

[Indiscernible] the unit cost is down 3% on the same basis. It means that we will change also and we are doing it already.

The network of Transavia France to adapt and that's one of the assets of the low cost is that it is quite more nimble that the [full] carriers and we can adapt the network much more efficiently that we will do on the main [lines]. On the cost side, you see that our operating costs, excluding fuel and ForEx, are up on this quarter by 1.3%; that is about EUR60 million.

The EUR60 million are 100% linked to the increase of third party sales because you know that in our business we also -- we sell to third parties in some of the [B2 billions] that is E&M mainly and [catering] to some extent. I will comment in detail on the employees' side.

To read this table you need to factor in the change in accounting that we made since the beginning of the year which is that now the cost -- the nature of cost is shown on each line and then what is capitalized in our balance sheet is shown within the line other income and expenses. So it means that you have the total cost, which I've shown in each and every line, but you have a profit to P&L, or less charge, which is [covered] in the other one.

That's very important, especially, for example, if you look at purchasing and maintenance, which is up 15%, it actually also include all the work what we do on our cabin configuration and which is then capitalized on the balance sheet, so that's very important if you want to read carefully this table. On the fuel bill, it's pretty stable actually, quarter to quarter, which is a bit of a surprise given the magnitude of the change.

But you see that we had a strong [decrease] of the market price, which is mitigated by the hedging. You see that hedging is now started to be smaller than in the first quarter and it will obviously carry on that way.

So the net impact of market minus hedging is increasing over the quarters. But we have also a massive impact which is linked to the [euro/dollar]; no surprise, so at the end of the day, the fuel bill is pretty stable in this quarter.

For the full year, we expect the fuel bill to be in the region of $7.1 billion, which is down -- strongly down, obviously, compared to last year. It spread more or less evenly during each quarter.

This forecast is based on the forward curve. So you know that the forward curve has [indiscernible] and is increasing so, hopefully, this [indiscernible] price, everything being equal, will help us to be a bit lower than that.

You see also that we have a significant upside coming in 2016 when the hedging is actually moving away. On the labor costs a significant decrease in the headcount.

It was expected with [leaves] and others Air France [PDV] that incurred in Q2, excluding [scope] because without some subsidiaries in -- and minority interest in [indiscernible] in particular but also [indiscernible] excluding the scope move the restructuring has led to exit nearly 2,000 FTEs during this quarter so quite an impressive number. However, you see that the labor cost is pretty stable; this is on the back of pension-related expenses.

You remember we explained that, due to the lower discount rate that I recorded in the balance sheet, the pension charge in the P&L without cash impact was a pension charge in P&L in KLM would increase by about EUR120 million for the year so that's about EUR30 million for the quarter. And on top of that, we still have some pressure on unit costs per FTEs, which is due partly to higher activity of Air France pilot, partly to some inflation in the [C&A] that proves that we need to be very strong in the discussion on freezing salaries and I think that KLM achieved quite something in the latest agreement with that regard.

We have also joined the first half provision some restructuring costs. In Air France about EUR60 million, which is linked to the PDVs which have been announced for 800 people; [indiscernible] about EUR40 million linked to the pilots who are leaving the Company; and in KLM itself EUR30 million for again a bit more than 300 people.

This has been accounted at June end. In the operating result, which is down by about EUR50 million, you clearly see that the fuel price benefit has been shifted to the market for unit revenue development.

I think that the graph is pretty simple. We have a negative impact of currency for about EUR50 million, which is broadly what we lose on the quarter on operating income.

You see that unit cost contribution is picking up but it is offset by the change in the pension charge that I just mentioned. In terms of unit cost, unit cost [indiscernible] plus 2% increase.

Corrected from currency change and pension it's actually down 0.5% in the quarter, which is an improvement compared to Q1. And we are on track with an increasing unit cost [indiscernible] through the quarters with a full-year objective which is, as you know, 12 -- 1.3%, even if the lower capacity that we have for the fourth quarter will take us probably at the low end of the range but we are on track with our initial plan in managing costs.

On the cash side, I think it was definitely a good beginning of the year with operating free cash which is EUR274 million; it was EUR95 million last year. Two things that I would like to stress.

First one is that we have a very strong working cap which is a very strong one and very good one because it's based on advance ticket sales which are running at very high level, so we have already some advance for the third quarter so it's good. I hope that we'll be able to maintain part of this advance [indiscernible]; we shall see, but definitely a good performance on this quarter.

And also, on the CapEx side, you see that we are growing slightly the gross CapEx on EUR835 million last year to EUR870 million but to a very limited extent, so CapEx are well under control. We had some non-monetary events on the net debt.

I mentioned the ForEx. We have some debt in Japanese yen, Swiss franc and, to a limited extent, in US dollar; this cost us about EUR150 million in ForEx impact on the debt.

We have also put back in the balance sheet some operating [leases] that we had in Air France for EUR130 million so it does impact negatively the debt as [indiscernible]. But, on the other side, we have disposed of Amadeus EUR327 million; we have issued the Hybrid for EUR600 million so the debt total is down by EUR850 million to EUR4,550 million at the end of June.

So it's a [indiscernible] of the debt compared to what we were a few years -- two ago -- three years ago, minus EUR2 billion and we are on track on our target to get EUR4.4 billion at the [year-end]. Just a word about pensions because it was a question during the first [indiscernible].

We have been helped by the higher, long-term interest rates that were recorded at the end of the quarter. So you see that now the change in actuarial assumptions, compared to December 31, is very small.

But, in the same time, we had a good performance of our assets; therefore, the end balance that we have at the end of the year has been reduced for close to EUR400 million. It's now sitting at minus EUR340 million at the end of June, which offers us a very strong funding ratio so I think that our pension situation, compared to many competitors, is not bad at all.

Liquidity is strong. We have completed some financial operation which obviously helped to improve the cash position.

We've refinanced our debt, as well. You see also that both Air France-KLM and Air France on the one side; KLM on the other side have successfully managed to renew their credit facility for the next few years so I think that on the liquidity side we've already passed the key steps that we had to go for, for this year.

So with the lower debt we further improve our credit ratios. We are, again, on track towards their [indiscernible].

Most important for us is the adjusted net debt to EBITDAR which is showing some further progress towards the EUR2.5 million that we have for 2017. That's it for the numbers for the first half of the year.

Thank you very much, Pierre-Francois. I will make a quick update on where we are in terms of strategy and the implementation of our Perform2020 plan.

The two ideas I would like to convey to you; first of all that we are perfectly on track on the roll-out and implementation of our Perform2020 plan as it was designed in January. But, second point, due to the difficult market conditions, the pressure of the competition and pressure on unit cost, we have had to accelerate and amplify the cost and competitiveness part of this plan.

So, first of all, we are on track on the plan we had designed in January 2015 on three elements. First of all that our growth initiatives are perfectly on track and we have -- we are facing strong momentum on these items.

Secondly, our cost initiatives are under implementation and we have made, on both sides, including KLM, good progress on the renegotiation of collective agreements. On the growth side, I would like to focus on three elements.

First of all, our investment in products and services are very well received by customers and I would like to say that our new products and services, both in KLM and Air France, are at the top level in -- when we compare to competition. For long haul, almost a third of our fleet is now equipped by world business class in KLM and by our Best & Beyond product in Air France.

You see on the right part of the page 27 on this slide the improved -- the significant, enormous improvement in terms of Net Promoter Score satisfaction index that is probably the best measurement of the satisfaction for customers. For the mid-haul in Europe for Air France, we have launched also a new [hubway] program.

Again, in the bottom right part of the slide you see that's a major improvement in customer satisfaction for this new product and service. And we have been awarded in Air France a Skytrax prize to be the world most improved airline in 2014, so it means that these product that have deserved an enormous program of investment accounting for almost [EUR1 billion and five years] to improve our product is having very, very good results with our customers and it's a key issue, as you know, for us.

Second point in Transavia, which was the second part of our growth plan, you see that we are perfectly on track in terms of growth for Transavia, particularly on the French part, because the Dutch part had to implement a restructuring plan and a shifting plan from a [tour operating] base business to a more classical, low-cost business and they have done that successfully with no growth but they have also implemented successfully a restructuring plan and a renegotiation plan with their personnel. You see on the right part of the page 28 that we are perfectly on plan in terms of growth.

Between the two first half of 2014/2015 we will have grown by 10% and we target more than 60 million passengers in 2017 with 65 aircraft. We have also invested a lot in the renewing of commercial positioning in new website, new digital platform, new branded fares, so I strongly encourage everyone in this room and on the phone and on the web to take Transavia; you would be more than satisfied, and use our new commercial features.

On the Transavia outside the French and the Dutch borders, we have re-launched the discussions with the various social stakeholders, including the pilot unions, and so we are -- we will implement these discussions in the coming weeks, and we target a growth outside the Dutch and the French borders by summer 2016. Third point for growth; it is maintenance.

As Pierre-Francois mentioned, it has improved significantly. It was one of our growth target for -- in the Perform2020 plan.

You see that in dollars between December 2013 and June 2015, page 29 for those who are on the phone, the order book increased by 44% and it represent now $8.5 billion accounting for almost five years of turnover. In terms of turnover -- external turnover and profitability, right part of this slide, you see that we are targeting in 2015 something which is significantly higher than in 2014 with a strong profitability.

So in these three areas; maintenance, Transavia, products and services, we are doing the job as we committed. On the cost reduction part, all the initiatives to deliver what we indicated at the beginning of Perform in January are on track.

We have -- we said that we will reduce our unit cost by 1.5% a year on the next three years, 2015 to 2017. It represent EUR0.54 a seat, the EASK, which is the synthetic KPI grouping [indiscernible] and seats.

And it represents in terms of money and equivalent of EUR1.8 billion in terms of cost reductions for Air France scaling. You see on the right part of page 31, the various items that are included in the Perform 2020 initiatives, representing EUR1.8 billion, almost 44% are non-labor related cost reduction measures and 55% are labor related cost reduction measures.

On the negotiation part which is in our business as you know a key element, on both sides in KLM and in Air France, you see that we made significant progress in KLM although the negotiations have been successfully concluded with a ground staff, with cabin crew and with pilots, for ground staff for 18 months, for cabin crew 15 months, and for pilots three years and so we are targeting the second half of 2015, the implementation of this agreement first of all and secondly, the relaunch for the negotiation with the cabin crew and the ground staff to cover the second part of the three year usual agreement we have with our Dutch employees. In Air France, the negotiation has been opened in beginning of May, because you remember that we had social elections inside Air France, so it explains why it started four months later than in KLM.

Negotiations are ongoing; I have to say in positive atmosphere, especially with our pilots. You have noted that we have concluded two agreements with them recently in the past days and that we are expecting positive issue on the implementation of the transform measures that was still under negotiation with them in the coming days/weeks.

So things are moving in the right direction. Very quickly, and that is my second point, despite the fact that we are perfectly on track on platform 2020 as we designed at the beginning of 2015 due to the context and the market environment which is tougher than expected and you see that on page 35 with the evolution of the unit for the new and the impact on our results, you see that starting in second half of 2014 the unit revenues in Air France KLM is everywhere the case I have to say.

My colleagues in various airlines will probably confirm that trend has been under pressure, but for us it has immediately triggered a significant turnaround in our track of improvement in our results. So you see that in also starting in second half of 2014 our improvement in our operating result has shifted from the plus to the minus.

So it has led us to implement new measures to accelerate the cost reduction part of Perform 2020 and to amplify this cost reduction program. So we have launched various cost reduction program.

I would like to give two examples, first of all for Air France, we have accelerated the [indiscernible] Air France restructuring part by merging the Regional operating carrier, Brit Air, Regional and Airlinair, by pushing on the voluntary departure plan that are also ongoing for cabin crew and for ground staff by renovating our commercial offer and by trying to manage, to optimize even more the fleet management that we have for this unit and you see that we are perfectly on track to target as we committed a breakeven for this part of the Air France network in 2017, right part of the slide. Second example, we have launched a major initiative in G&A reduction expenditures.

As you see, we have a base for Air France scaling of G&A cost of EUR1.5 billion that is split between the various cost centers, if you see on the right part of this slide, we are targeting to reduce that by something that EUR300 million, we have already identified EUR150 million and we are working hard to reduce that significantly by various measures, cost reduction delayering, simplifying the organizations and relying on more outsourcing for this part of our cost. So that are the two examples that I wanted to share with you.

We have also in general amplified what we had in the Perform 2020 plan by putting pressure on our capacity. We were targeting for Q4 growth in capacity of 2.3%, we are now targeting 0.3%, so we are even more cautious in terms of capacity increase.

We have implemented various immediate measures on expenses, purchasing. We are targeting EUR80 million impact for Air France.

They had been announced in June by [indiscernible]. We are accelerating all our cost savings initiatives and we have fixed a very clear deadline for our unions to conclude our negotiations for calamities, done, they are still to implement the agreement and to relaunch second phase for the cabin crew on the ground.

For Air France it is ongoing and the target date is September 30 to close the negotiation. We strongly believe that we are able to conclude agreements with our staff to reduce our cost at a level that allow Air France KLM to fight -- to be on track again on the growth path with a significant savings from all the categories of employees and it is our central scenario.

If we do not achieve positive agreements in that regard, we will be obliged on those side first in Air France and quickly after in KLM to reduce our long haul network significantly. In terms of outlook for the second half of 2015, so as you see the Perform 2020 program as it was designed, all the initiatives are under deployment and perfectly on track.

We were expecting savings on fuel bill, but they have been completely offset by the unit revenue pressure and for those who remember our annual results for 2014, we flagged it from the beginning. We have been accused of being very cautious, but the reality is unfortunately I have to say in accordance to what we planned.

For the second half capacity growth, we have revised our capacity growth down from 1.8% down to 0.9%, so we are still very cautious and very strict in terms of capacity discipline and our financial targets are totally unchanged. We target a range of 1% to 1.3% during cost reduction first of all, of course at constant currency, fuel price and pension that's as usual, and our debt target is unchanged at EUR4.4 billion at the end of 2015 and Pierre-Francois has in detail commented that point.

So as a conclusion I will like to say that in the [gross] part of Perform 2020 is on track and successful, in terms of product and services, in terms of growing Transavia maintenance. We maintain a strict capacity discipline and a very strict investment discipline and it has produced the significant improvement in terms of cash generation that Pierre-Francois has commented on.

We have a very precise and clear timeline and schedule for our social negotiations on both sides in KLM and Air France and a clear alternative we target a successful negotiation if it's not successful which is our main target where will have to reduce our long haul network. We have accelerated our cost initiatives due to the revenue pressure and to the strong competition we are facing and we are also looking for those who are reading some newspapers, you have probably noted that we are looking for the support of other stakeholders, our governments, the EU to lift some heavy chargers that we have on our shoulders, to reduce some cost and taxes or airport charges or over flight fees and to help and to launch a negotiation round with some external to EU states to balance what is sometimes considered as unfair competition.

Thank you very much for your attention and we would be very happy to answer your questions.

Good morning [indiscernible]. If you can during the first one on forward bookings, because with this very good performance in terms of advance ticket sales.

Could you give us maybe some color on July and August and if possible, the breakdown by network. And the second one on Perform, because you said you are on track on Perform, but you are expecting your position transform.

I have not seen huge progress on Perform on the Air France side, could you elaborate a bit on the negotiations with the unions. And maybe the last one on [indiscernible], could you let us on the current status on your discussion with the [indiscernible] both regarding Atelier and the efforts of development of your relation with [indiscernible] on the Middle East and on the Asian network.

Okay, on forward bookings, first of all I would like to stress that in the current environment which is heavily impacted by the currency impact, by the fuel price and by the growth rate everywhere in the world, it is absolutely terrible and difficult to draw clear conclusions on bookings for unit revenues first of all, so be cautious. Everywhere in this industry for those who are participating in the IATA meeting, you have probably questioned my colleagues, everyone is very, very worried about the lack of visibility in terms of unit revenues and the lack of correlation between bookings and unit revenues and due to the phenomenal impact of foreign currency and the fuel price, that has really completely shaken our forecast, but that's everywhere.

We are not alone to say that as you know. But just to give you a glimpse on what is happening on bookings, booking for July and August are positively oriented.

But no definite conclusion please, be cautious. Second point, on Air France and the progress for Perform, Perform has been implemented in Air France and KLM differently in terms of schedule, you'll remember KLM started negotiation in December, because their agreement were ending by end of 2014 and it took six months at the end to conclude the three negotiations with the cabin crew, ground staff and pilots, which was what we had in mind and exactly the deadline that Peter always had fixed with his unions.

Frederic Gagey has launched his negotiation with Air France in the beginning of May. As planned, you remember we had elections in April and so we couldn't negotiate with the teams who are finishing the mandate, because they cannot commit.

So we started in May, Air France started in May -- at the beginning of May its negotiation and Frederic Gagey has fixed deadline of by the end of September to conclude the negotiation. If you look at your papers, you will see that we said at the beginning of the year that the negotiation should be concluded in October and also we are exactly on track.

We are not used to commit on something and not to hold to our commitments. On Alitalia and Etihad, as you know we have three very strong links with Alitalia, one in Europe, one in maintenance and one in the North Atlantic.

All these agreements are still valid and ongoing and we are discussing with Alitalia how we can maintain for mutual benefits, when I say its mutual benefits for them and for us, particularly the European agreements that they have -- that they want to renegotiate. So we are discussing with Alitalia to maintain this relation.

At the high level we have then, with Etihad discussions are ongoing in terms of collaboration and the passenger business. I take advantage of your question and thank you and thank you to raise it to kill definitely what I saw in the press article coming from another country in Europe that we are in discussion for participation of Etihad in the capital of Air France KLM, it is not true at all.

No reality on that point. Discussions are on the traditional [corporation] on the passenger business.

Did I answer all your questions, yes?

Could you update us on transit and cargo in terms of volume and pricing?

Yes, we had -- as I mentioned, we had [indiscernible] in cargo, I think with basically different kinds of -- the first one is at, as I mentioned, is a pickup in demand [indiscernible] that we had at the very end of last year being this year as [gone]. So definitely we demand, we still have a lot of capacity coming in with full fighters coming from the Gulf carriers but also the Chinese carriers, so still a lot of capacity coming.

And three, the question on the price, which is led also by the decrease in fuel surcharge which accustomed to the market including with these players who are unhedged. So definitely the unit revenue development that we've seen during the first quarter from cargo are disappointing.

In passenger business we are broadly in line with our expectation, in cargo we are definitely below what we had in mind for the year. We expect some recovery in the second half of the year, which are mainly based on the restructuring of the network that we've been carrying on.

If you look at what we have in mind, we decreased further the full fighter capacity during the second half, so we are playing with the network to make sure that we shift our capacity to the best tools. So we expect the unit revenue not to improve, but to deteriorate less during the second half of the year than in the first half.

I would like to mention then when you go for restructuring in cargo, it works. And when you look at the full fighter operations that we have today in Charles de Gaulle, they are basically a zero ability incomes.

So we breakeven, we can breakeven in the full fighter operation as long as we go with the tough restructuring, decreasing cost and also resifting the network. So that's what we have been doing in Charles de Gaulle.

That's what we are doing today in Schiphol, and we are looking heavily to that. It's fair to say also that we need to work further on cost, we need to work also on the revenues.

I mentioned the yields, the load factor [RevPAR] during the first half of the year, we have changed a bit our policy to make sure that we feel reasonably the air craft, which is being done since May and it show already some improvement on the load factor. So we believe that the second half should be less negative, that's what we've seen during the first half.

The priority for us to execute the restructuring that we have still in Schiphol and that we'll be at the end of the year that we'll start to see some other impact. Another question in the room?

[Neil Glynn, Credit Suisse Securities]. Just two question about -- first of about Transavia, you said that you have to organize your network because of problem in Africa and perhaps a little about Greece.

The effect of this reorganization should be quite negative on the third quarter or it's gone right now. And my same question is about the maintenance business and which is perhaps with a bit of visibility.

Can you give us some idea about the impact on the profit margin of the growth first and opposite change in currency please.

On Transavia we have already started to change the capacity. I mean one of the great thing to be in this business is that you can really adapt the network in a much more nimble way, that's what you can do on the full carriers.

So we have already started to decrease our operation in North Africa and for example we move to new route [indiscernible], we move Leone to [indiscernible] and we can really play with the network much more aggressively that we can do usually. Also I would like to mention that even if North Africa is hit, the yield that achieve in North Africa are still very good.

So we are not going to get North Africa, because we have [indiscernible] visit France and relative in North Africa, which is a very good market. So it's still there.

It's just that, if you look at Tunisie, it's still there and if you look at some other destination, some other route, it's not there. So yes, we have to change the network.

Is it going to help a lot the third quarter, I know I can especially the third quarter is also a very important point, July and August and especially August are very important months for Transavia, which is a very seasonal business. We do not see a major REIT during the third quarter on that part, but we will carry on refocusing the network.

It is definitely not exactly what we planned, and we missed an opportunity with North Africa, we are not telling its good, but it won't be a disaster. Its jus that we need to change a route and that's what we are doing.

On E&M, you need to be careful when you look at quarters numbers, you know that it's a business which recognize revenue based on milestones for a large part of it. So you can have a very important shift in margins.

I think if you look at [indiscernible], the first one is at organic growth is long, and organic growth is not at all derivative on margins, so we do not [indiscernible] would be derivate on margins, there is no risk about that, so the way the contacts are always a risk attached to a contact, with the reason I can tell you that we are not going determinately to margins, that's not what we are doing. It's true that we have a push on margins which is linked to the fact that we have 30% of the cost in euros.

This is not unknown to our customers and we have already customers turning back to us and say, hey guys, you're going for windfall profit, please give me back, we will not maintain this profit for 10 years, but we befit at this time lagging effect for a while, and it gives us a very strong position in terms of negotiation with our customers. So that's indeed a rather good news, so you can expect margins would be well oriented.

Again, I stress that this quarter was very strong. You may remember that the first half last year was not a big one for [E&M] and we made a much better second half, so you have a basis effect, so please do not factor in such a massive improvement that you have in the quarter into the full year.

However, it's clear that business which is doing very well today. Other questions?

That's from the telephone? Yes, please proceed.

[Question Inaudible].

Yes, if you could articulate slowly, because the sound is terrible.

[Question Inaudible].

So we'll try to translate, as I know that we heard on the phone, but I understand that your question, I hope it's true, is related to the fact that we have a unique consolidation in the quarter of minus 0.5%, but we still maintain the target of minus 1% to 1.3% for the full year, and where is it coming from. I think that we may be already doing the first quarter release, that we expected the unit cost improvement to appear mainly in the second half of the year.

And this is on the back of two things, the first one is that we have some cost measures and mainly as a lease there, so you will have the full impact on the second half when you add only and the third quarter. And we have a second key item, which is that our capacity growth is focused on the third quarter [and H] to increase our capacity with the lower increase in cost.

So we have good reason to believe that the unit cost valuation will improve through the quarters up to year end. You remember that during the first quarter we had basically no unit cost prediction, it was minus 0%, minus 0.5% during second quarter, we had a much better in Q3, that's urgency measures added by the two airlines and they've been announced a few weeks ago.

That will also help to secure this target, which is obviously and you're right to point it out, more challenging since we have decreased our capacity expectation. I mean we have slow down our capacity significantly, especially in the first quarter, so of course it's putting pressure on our target.

So basically in terms that we are with the restructuring given the increase of capacity in Q3 and given the urgency measures that both KLM and Air France have announced, we believe we can make it, there is a strong acceleration in H2.

Yes, good morning. Can you hear me?

It's okay. Please, please move on.

Great, thank you. Two questions please.

My first question is regarding Transavia Europe where you mentioned you're relaunching discussions with the pilots. That was obviously a major sticking point with the unions during the strike.

Do you feel you're now getting better engagement with the pilots? And if you were to relaunch that initiative with Transavia moving outside of its home market, will that be included within your current growth plans for Transavia to get 16 million passengers by 2017 and 65 air crafts or will you be looking to accelerate that growth rate?

That's the first question. Second question on the North Atlantic, I appreciate it's a good market for you and you benefit from US dollar run fuel, but the pricing performance there has still dropped by about 5% compared to Q1 from plus 2% to minus 3%, with not much capacity growth.

I wondered if there is any reasons for that deterioration and in particular, how is the relationship with Delta, given they are focused on growing their own joint venture with Virgin out of London this year across the Atlantic. Thank you.

I will answer on Transavia. So on Transavia Europe, clearly first of all for on the Dutch side, we have had an agreement with the Dutch pilots in Transavia first of all to reduce cost in Transavia, but it is also in the discussion we have with the Dutch pilot to see how we can develop Transavia outside of Dutch borders.

For the French pilots, you have probably noted that publicly the French Head of the SNPL said that he was ready to discuss the development of Transavia outside French borders. So we have said that we are ready with both organizations, both pilot organizations but with also other unions that are also involved to open this discussion related to the development of Transavia outside French and Dutch borders.

We are ready to be done and we are targeting an implementation by summer 2016 of this growth path. Secondly in the figures I gave in terms of millions of passengers in 2017 a number of aircraft, this outside of France and Netherland growth is not included.

So it will come on top of the figures I gave to you previously about Transavia.

On North Atlantic, thank you for giving me the opportunity to elaborate a bit on that. I think that it's very much that you get the vision about North Atlantic, actually the unit revenue has not deteriorated during the second quarter.

If you look at the unit revenue in nominal terms, it is actually increasing and increasing significantly during the second quarter in line with Q1. So we have a plus 6% unit revenue development actually in the second quarter on North America.

And if you look overall at the unit revenue development in the second quarter, in nominal terms it's still positive. So you have a massive impact on the price, so when you look at the economics of the joint venture or the transatlantic, from outside you need to take in account the actual currency conversion between US dollar and euros.

So it's definitely a great boost. And that's the reason why we can accept to have a lower yields excluding north, but when you get them back in euros, actually it's very strong.

So today, we do not have actually an issue with North America. It's definitely doing good with obviously a shift of that new formula to the US which is linked to the currency.

That's why when you look at the numbers excluding [north] you need to be very careful and factoring the currency impact. So unit revenue on North America is not deteriorating in no terms, on the contrary, it is improving.

Hello? Okay, I have two questions, so I'll just try one.

I just want to understand if your unit revenue [Technical Difficulty].

Hello, hi there. Can you tell me whether you see any risk for your plans to lobby governments under EU given the decision of several companies [police the IAAA] and a lack of alignment on attitudes towards the [whole issue].

And the second question would relate to your attempts on cash pooling with KLM. Has there been any progress in normalizing the media and political environment in Holland to allow this normal corporate process to take place?

So on the lobbying issues, we have three sets of issues. First of all, with our respective national government, the French and the Dutch government, we are asking our two governments to help us in terms of lifting some charges, reducing airport charges, overflight fees, some taxes.

And we have specific lobbying plans with each government on that -- on these issues. First of all, we have a reasonable expectation in terms of government reaction to help us, especially in giving arbitration between Aeroports de Paris and Air France or in helping us to discuss with these people or with the civil aviation.

So it is working, and normally with a reasonable timeframe. We have a second set of issues, which is with Europe and that we are pushing with four of our colleagues, namely Lufthansa, British Airways, Ryanair and easyJet, we are pushing Europe to lower the cost everywhere in Europe and to improve the competitiveness of the European sky, which is among the most expensive [Technical Difficulty] will be probably more -- will be longer than for the national timeframe.

But we are pushing hard. And we expect a new aviation package by the end of this year.

And we have a third issue that we are pushing mainly with Lufthansa and some Nordic country airlines is to renegotiate or to open negotiation with the Gulf States to balance the competition conditions. We are pushing hard to open negotiation, to give a mandate to the European Union to negotiate with the Gulf States about aviation and to have fair competition conditions.

We are also pushing Air France-KLM litigation management system for aviation, which does not exist currently, which would be similar to what is in place inside the WTO framework. That are the three sets of issues we are pushing.

On the cash pooling issue?

Yes. This cash pooling issue was very emotional, so we know that emotion can be both in the north and in the south.

So when it's emotional, you'd better try to find a pragmatic way. I think that we've done good progress.

You've seen that we've been able to manage, one, the issue of the hybrid, which is a subordinated bond at the level of the holding. Two, we've been able to renegotiate and renew the credit facilities both in France and in Netherlands successfully.

So it's done. I think that we've found what I would call a workable scheme.

I would have preferred an optimal way, but we work -- we define a workable scheme. It's not the end of it because we are also working on different ideas, not about cash pooling.

I think it's definitely not on the agenda. But we are working on a good way to get KLM accessing financing at Group level and tapping the capital markets through holding.

I think that's very important. That's the reason why holding wants to tape the capital market, it's to [online] the proceeds to the alliance.

And today we are working on different schemes that will help both [AFK] to tape the market in a good manner, and two, to [online] theses proceeds to [KL]. I think that we are working pragmatically.

And I'm confident that we can find something which is quite workable and beneficial to all parties.

Good morning. I have three questions.

First of all, can you give a vision of the size of Transavia Europe outside of France and Holland? Secondly, can you quantify the extent of potential long-haul network reduction if you don't reach agreement with the Air France pilots' union?

And how many aircraft deferrals are we talking about? And also why cut long haul when I thought that was the most profitable part of the business?

And then thirdly, of the operating loss for the first half, are you able to break it down between Air France and KLM? Thank you.

On the Transavia outside France and the Netherlands, we are targeting some aircraft for 2016 and the doubling of this number of aircraft in 2017. Let's say something which would be slightly less than 10 aircraft outside of France and Netherlands.

Secondly, for the potential downsizing in case we do not achieve successful negotiation, which is again not our central scenario, we are targeting to successfully negotiate with our employees. It will be a significant reduction.

It's still under work and we are studying that. We are not -- we will not disclose that before due time.

We will disclose it in due time, and first of all with our people before disclosing that openly outside. Sorry not to give you more.

I think it's clear that we don't want to go into any blackmail. And I think that's very important that it's not our position.

But you know that on Air France we have a significant share of our long-haul routes which are losing money. And this needs to be addressed.

And there is a good way to address it, which is to improve the competitivity of our own cost. And if we definitely reduce the number of loss-making routes, it's normal that you have a certain amount of routes which are loss-making because they also participate to the network and the global footprint.

However, today's level is unsustainable. So of course, if we cannot improve our cost, our competitivity, then we have at least some lines which are [being rescued] that will have to be challenged and probably closed.

That's where we are. And the magnitude, it's too early to say because it depends of what will be achieved.

And there is a third question, I understand.

We don't remember.

No, I have it because I have a special information. Can you specify operating profit in H1 for AF and KL?

I think we have a slide there.

We have a slide there.

In the appendix. If you look at the appendix anyway, for those who are lucky enough to have one after, it's page 47.

So if you look at page 47, you will see that basically the EBITDA margin of Air France and KLM in the second quarter are very close actually. And you know that Air France has benefit still from a strong momentum from Transform 2015.

KLM is just relaunching cost initiatives. Therefore there is definitely an improvement in Air France.

Also you need to remember that this pension adjustment that I mentioned, which is for the full year EUR120 million, is hitting EBITDA and EBIT at KLM level. There is no cash impact.

But there is a big impact on EBITDA and EBIT. And the margins are actually equalizing over the second quarter.

We do not comment on operating profit. We do not comment on operating profit at Company level.

But you can imagine that it's now getting very close during the quarter between the two airlines.

Hello. Good morning.

A second attempt. If I could ask about the long-haul fleet position, please.

And in particular you mentioned potential if you don't reach agreement for a significant reduction. Would that reduction focus on just one fleet type potential or I see there's been some contingency planning there already?

And secondly, in terms of the shape of the long-haul business going forward, very noticeable that your long-haul premium business in North America is doing better than average. Will that influence the shape and mix of where you allocate future capacity or indeed how you might allocate what you've already got?

Thank you.

To answer the second part of your question, we permanently allocate our aircraft between the various parts of the world. We reduce capacity or frequencies on some countries or some areas in which we are facing difficult conditions, namely, for instance, South America.

And we reallocate that to the most profitable part of our network. That is normal business.

The point there is that we have to be cautious again. And if you remember last year, we flagged that the reallocation to North Atlantic was too fast coming from everyone, not from us, by the way.

Not from Delta and from us, but coming from our -- the [other three] again. We have to be cautious when we reallocate not to put too many capacities on a so-called profitable part of the network, otherwise we destroy the yield.

As usual, normal business, but we do that cautiously and in a reasonable manner. Do we change the composition of the fleet?

Yes, the change we have in our fleet plan is to replace our old aircraft, namely the 747 and the 340 for Air France and the 747 for KLM, buy new aircraft 787 and 350. So it is normal [Technical Difficulty].

Therefore if you do have to shrink the fleet, would that be shrinkage across all aircraft types or ones which you have marked for retirement anyway?

[Technical Difficulty]. It's a balance that we have and that's part of the discussion.

And this point is open.

Thank you. If there are no further questions either on the phone or in the room, thank you very much for your attention.

And yes, the session is over. Thank you very much again.

Thank you.