Air France-KLM S.A.

Pierre-Francois Riolacci - CFO Erik Swelheim - MD & CFO, KLM

Neil Glynn - Credit Suisse Jarrod Castle - UBS Stephen Furlong - Davy Research Michael Kuhn - Societe Generale Andrew Lobbenberg - HSBC Oliver Sleath - Barclays Capital Johannes Braun - Commerzbank Damian Brewer - RBC Capital Markets Anand Date - Deutsche Bank Jack Diskin - Goodbody

Thank you. Good morning, all of you.

Thank you very much for attending this first quarter release call in the morning. I'm here with a few colleagues, the IR team, controlling and the CFO of KLM and we'll be happy to answer your question after the presentation, the usual presentation.

Of course on this first quarter you see that we benefit from a favorable environment. I would say quite lenient environment, because the net balance of the Forex, the lower fuel price and the unit revenue development is significantly positive.

However, we note also that it is a strong first quarter in terms of operation, with a load factor which is up by two points, despite a mixed demand around the network. Europe proved to be quite resilient with a strong performance on the domestic French routes, on the back of the restructuring of our network.

And on the long-haul it was a mixed story, with, of course, a negative impact of the geopolitical unrest and the aftermath of the Paris attacks and what happened in Brussels at the end of March. But also, the continued weak economic performance of Brazil, definitely an issue and also the poor performance of the oil related routes which you know we're exposed to.

On the other side, we had a quite positive recovery from Africa which last year was under pressure, especially with Ebola. And we fully benefit also of our network adjustments in Asia.

That's it basically, for the passenger business. I think that a resilient unit revenue in the passenger business is one of the key features of the quarter, with the unit revenue in the passenger business being flat, in nominal terms and minus 1.3% once adjusted from currency conversion.

Beyond this environment we have also some significant achievements during this quarter. The first one and the most important for us, is of course a decrease of the unit cost which is down by 1.3%, excluding fuel, currency and pensions which is line with our full year guidance.

You see also the very successful development of our revenue enhancement policies, whether you look from the network perspective, with the capacity discipline and the network adjustment, whether you look from a dynamic steering of revenues through revenue management and pricing, the sales operation, also the product upgrade, in which we have invested which is clearly now paying off with an improvement, continuous improvement of the NPS and the very good feedback we have from customers on the product upgrade. I mean, all this is coming in and it explained in our view a lot of unit revenue development and resilience in keeping the fuel price benefit.

We're also satisfied with the restructuring of the cargo which proved to be very efficient this quarter and allowed us, despite a very negative environment, to improve the results. So point-to-point restructuring which is also a big success in terms of contribution.

And last but not least, the Transavia growth is on track. So we improved basically all our KPIs.

I would like also to mention that we made a decision about Servair, given the process is moving forward, we have treated Servair as a discontinued operation as of January 1. So Servair is out of the contribution of the Group, at all P&L level, but for the, of course, the net income from discontinued operations.

So if you move to the key data, I will not elaborate on all lines. The top line is slightly up, plus 0.4%.

This is including a positive currency impact of close to €100 million. Adjusted from this currency impact, the revenue is down by 1.3%.

There is a strong improvement of profitability wherever you look. EBITDAR, EBITDA, EBIT.

The operating result is up €318 million which is a very strong improvement, of course, compared to the first quarter of 2015. I will come back on the bridge of the actuals, numbers.

The currency impact is still negative. It's a headwind during the quarter of about €80 million which is, again, in line with the overall guidance of the year of a negative Forex impact of close to €300 million.

A very strong point is the generation of cash during the quarter. The debt is down below €4.2 billion, despite, as you know, the first quarter is not a very strong quarter for us.

And compared to last year, we have no significant disposals of assets, so this is really a decrease of debt on the back of the strong cash generation, including the working cash. Going on the contribution per business, I think that, as you can see, the revenues are flattish, I explained.

This is, on the passenger business the impact of the very selective growth in capacity, together with the clear network adjustments and the overall unit revenue pressure that I mentioned earlier. On cargo you have the impact of the restructuring, the full-freighter capacity is down 32% and on top of that we have a stronger budget, double-digit decrease of unit revenues.

All in all, the unit revenue for everything, including cargo pack, is down 2.4%, with minus 10.8% on cargo. It was, however, a resilient first quarter that indicates some recovery from the November Paris attacks.

In terms of traffic we believe that it is fully compensated, we still have some negative parts on the yield, as you can imagine. Strong growth, again, on MRO and Transavia which is now not a surprise and both are up with high single-digit like-for-like.

The operating result, you can see that we're strongly up, of course, as I mentioned it, for the Company. The big driver is the passenger business, with the impact, especially, of the fuel price decline.

We're very pleased to see that cargo is still improving, despite very negative unit revenue development. You will see, also, that we're stabilizing our margins for maintenance, excluding currency and Transavia is developing along our expectations, despite, here again, some very significant geopolitical challenges, especially in the North African part of the network.

If we go to the passenger business, strong capacity discipline. We're up by 1.1%.

It's good to know that Air France capacity is down by 0.6%, while KLM is up 3.9%. So you see a really discriminated growth pattern on the two companies.

Our long-haul capacity is up 1.8%, while on medium-haul, it's down, minus 1.4%, driven by the point-to-point network reduction, minus 6%. Together with this limited growth of capacity, we have a strong increase of traffic, plus 3.6% which allows the load factor to go up 2%.

So, indeed, the nominal unit revenue is stable which I think is a very good result, given the environment. What was supportive, of course, was the product upgrade, the network decisions, efficient pricing revenue management, aggressive sales.

However, it's not a walk in the park and I would like you to understand that this is the outcome of a lot of actions. We faced very strong volatility during the quarter.

The three months are different. The trend is not well oriented.

I'm sad to say that January was better than March and within the months we have huge volatility from one week to the other with this trend which is confirmed about the late bookings of our customers. If you adjust from currency, the RASK is down 1.3%.

of course, we carry on steering, including the currency impact, even if this quarter the impact of the currency variation was a bit less than what we had faced last year. This overall pressure on the unit revenue reflects the oversupply of the market.

It reflects also the fuel price decline which allows some flexibility in some markets for some competitors, but it reflects also the weakness of some of our key markets I mentioned already, Brazil, oil and gas, but I could mention also Japan. It's good to know, also, that on the long-haul the RASK is down 1.6%, but the premium is stable, even slightly up, 0.2%, more resilient than the rear cabin which is down minus 1.5%.

The CASK on tax is down 6.7% which affects, of course, the mix of the currency variation and the fuel and we post, excluding currency and fuel, a strong minus 1.7%, in the tax business. Of course, this is by far the first contributor to the Group performance in the first quarter.

If you go page 6 of the presentation, we give you some history about the passenger business. You see the continuous deterioration of unit revenue, excluding currency, but which is, at the end of the day, pretty stable over the last seven quarters, with a strong capacity discipline which, for us, is a key of reasonable behavior of the unit revenue.

If you go page 7, to the geographic split, there is no big change compared to what you are used to see. Maybe on the long-haul I would mention that it's still a contrasted picture.

All in all we grow 1.8% capacity with unit revenue down 1.6%, excluding currency, stable at nominal. If you look west, you see that on the total America we grow capacity by 5.9%, with unit revenue down 4.1%, with North America plus 6.7% capacity, down 3.8% in unit revenue, but a nominal RASK, as you can see, it's close to be flat.

In south America we grow 4.5% capacity, with unit revenue down 5%, excluding currency and the big drag is of course Brazil, the other markets being quite resilient. Good news is coming from Africa.

I mentioned that last year was a low base and we've recovered from this low base, with limited growth, of course, 0.3%, but plus 4% on unit revenue. That's of course a big success, if you take in account that our oil routes which are very important in Africa, have not recovered.

In Asia we have restructured aggressively the network, minus 4%, especially in Japan and we managed to keep the decreasing unit revenue to minus 3.1%, excluding currency which is, given the competition in this area, quite a good performance. On Caribbean and Indian Ocean, we grew capacity by 4%, with unit revenue down only 0.8%, excluding currency which is, of course, a good performance.

On the medium-haul, I mentioned already the point-to-point restructuring and the hub resilience. I think here again, some people expected that the Q1 could be very difficult.

It was at the end of the summer last year. It proved to be acceptable, as you can see in that number.

On cargo, the environment is still really tough. We see a lot of pressure on the revenues.

Our unit revenue is down 9.1%, 10.8% excluding currency. We see no pick up and we were able to limit this impact, thanks to the strong capacity adjustment that we have made, as, as I mentioned earlier, we decreased full-freighter capacity by 32%.

We have today eight full-freighters in operation in Q1 and we're on track to be at five full-freighters, early summer, as expected. The overall capacity is down only by 8.1%.

This is including baggage. I mentioned the restructuring.

It is fully on track and as you can see, despite this capacity reduction, we're able to post a decrease in unit cost which is quite impressive, down 9.6%, including fuel and Forex. Excluding fuel and Forex, we still post a decreasing unit cost in cargo of 1.1%, with the FTEs being down by close to 10%, so that's really an impressive restructuring by the cargo teams.

On maintenance, it's another strong quarter which has been posted by the business. The top line benefits from, of course, the U.S.

dollar difference, plus 13% and even excluding currency, we grow revenues by 7%. You remember that last year we had a double-digit growth, so it's really a good number.

The backlog is running at a record high, again, $8.7 billion, with impressive wins, again, during this quarter, especially [indiscernible] which is, I think, a benchmark, so we're very pleased with the development of the business. The operating result is €38 million which is up again, €3 million and we see the margin stabilizing.

I think that even if it is a very successful business, the competition is there. We face some supply chain challenges, in some of our divisions and of course we're also phasing out mature contracts where we're starting up new contracts, where margins of course are a bit lower, so we're really growing and managing the stability of margins at a time we're having wins, the portfolio, I think that's, again, a good achievement for the team.

On Transavia, you see that the global capacity is up plus 8.4%, with a stable load factor, down 0.2% and the number of passengers has increased by 14%. We have been hit by the geopolitical turmoil in the leisure market, especially in the North Africa, but also, to a lesser extent, Greece, Turkey, many countries which are leisure exposed.

But we demonstrated a strong capacity to adapt and to change the networks. On Transavia Netherlands, the model shifting is on track.

The ASK is up 3.6%, but really, decreasing sharply our charter exposure and growing our purer cost exposure. The unit revenue, stage length adjusted is flat, while, in the same time, the unit cost is down 1% again, stage length adjusted excluding fuel and Forex.

We're satisfied with our Munich operation which started at the end of March, with two aircraft. We're a bit late, compared to the schedule, but we're on track on the business plan, on this Munich operation, that are, of course, very important tests for us, out of our Dutch and French bases.

Going back to Transavia France, you see that the ASKs are up 19%. The unit revenue is down 5%, stage length adjusted.

This is explained both by the geopolitical impact I mentioned, but also the large number of new routes which are being opened in the last few months. The unit cost is down 1%, stage length adjusted again, excluding fuel and Forex.

Looking at cost, page 11, I think that the operating costs, excluding fuel and excluding currency, are up by 0.3% which is broadly in line with our capacity increase in EASK. I will come back on the employee costs, maybe to us to mention that the aircraft costs, excluding Forex, have reduced by 4.5% with the impact of our capacity discipline, but also operating efficiency and the leases optimization.

And another point which is important, is the plus 6% in the purchasing of maintenance services and parts which is mainly due to the growth of our third party sales in E&M that I just mentioned. Going to the fuel bill, it's down €384 million compared to last year.

It's worth to note that the impact of hedging quarter-to quarter is now zero. Of course it is still significantly negative, but it is negative in the same amount that what it was last year and therefore we benefit from the decrease of the market price, mitigated, of course, by the currency impact which explains the total fuel impact.

It's worth to update you, page 13, on the fuel bill for the year. So this slide was prepared a few days ago and it shows that the fuel bill would be down by $1.8 billion in 2016, compared to 2015 which is worth €1.6 billion.

You know that that the price of jet and Brent is moving up, however, as you can imagine, our sensitivity is decreasing as we have hedged now a significant part of the portfolio. You can see also that percentage of consumption which is hedged is much higher than what you are used to seeing.

You can discount, out of this 73%, about 17% which are actually made out of co-adaptation. So there is no downside exposure associated to this increased hedged proportion, because it has been done through co-adaptations, so no downside exposure.

I would like to point out also that these co-adaptations have strike price which are quite high, to limit the amount, let's say that we have on top of our usual policy, about some protection for a sharp increase of the oil price in the next quarter. If you go to the operating result bridge, how we made it from minus €417 million last year minus €99 million this year, of course, we had a few benefits which is, before currency, €450 million, we just discussed and as you can see, we've lost, with currency and unit revenue, about 45% which means that we have retained 55% of the fuel price decrease which is in line with what we have seen in H2 last year.

You remember 60% on Q3 and in Q4 40%, including the Paris attacks, so, probably, 55%, 60% during the Q4 was a real number. Again, I would like to point out that this is an achievement.

This should not be taken as granted. And you've seen that some of our competitors were struggling to retain such a big chunk of the fuel price decline which has a lot to do with the action I have mentioned.

The unit cost also is down, minus 1.3% and it gave us a €67 million push on this first quarter. There is no significant pension effect on P&L.

This is of course quite different from what we had last year. If we go a bit more in depth in the employee costs, I think that we have done well in terms of productivity, quite well, actually, because we have cut -- of course, this FTE's numbers are further adjusted.

That's why they are lower than the numbers we're used to see. It will improve, of course, a ratio of ASK [indiscernible], that reflects more severity.

And you see that on these adjusted numbers, the headcount is down 3000 people and this is the impact of the restructuring that I have mentioned, everywhere in the Company, both in Air France, the majority in Air France, but also in KLM. I think that's really an achievement in terms of productivity.

We still have some pressure on the cost, labor cost per employee and as you can see, the total cost of employee is increasing, despite the decreased number of employees. A part of this increase is on the back of profit sharing which is about €40 million, quarter-to quarter, both in Air France and KLM, again, majority in Air France.

And adjusted from this €40 million the employee cost would be down 1.2% during the first quarter. So, indeed, we continue to see that pressure on cost per employee and that explains why we have discount negotiation on the CLAs in KLM and why also we're taking action in Air France, including all the implementation of the last stage of transfer.

If we go the unit cost, I think that the reported unit cost is down 6.8% and adjusted from currency, fuel, pension, minus 1.3%. It is fully in line with our full year guidance.

That's it for our operation. If we look at the cash flows, of course, we're very pleased to see that the EBITDA improvement is, again, in the cash flow.

You see the numbers on the page. I would like to mention that on the voluntary departure plans, minus €39 million is in line with our full year expectation which is around minus €200 million.

You may have seen, also, that we have booked a provision for the future PDV of €150 million. It is non-cash, of course.

But I just mention it here. On the working cap, it's plus €524 million which is a very good number, better, even, than last year.

You remember, at the end of the year, that I mentioned that we had a working cap which was comfortable and it proved to be true and the first quarter is recovering from what happened in the fourth quarter. So we're, today, at a normal level in terms of pre-paid tickets and which compares to what we have seen in the previous year.

We have increased our CapEx number. Our net investment is €544 million.

The gross investment is €607 million which is up €200 million compared to last year, but despite, as you can see, this significant increase in CapEx we're able to improve our operating free cash significantly which is positive, by €200 million and that allows us to decrease further the net debt at the end of March. Of course, if you look page 18, the credit ratios, it's based on the last 12 months trading.

And then, when you grow EBITDA and EBITDAR very significantly, while decreasing the debt, you have a very sharp improvement in the ratios and we're very pleased to be on track for 2.5x adjusted net debt to EBITDA ratio which is, as you know, a key metric in terms of credit. We of course, want to be there, not only in 2017, but mid cycle.

Now, if we go to the outlook, I would stress that there is today still a very high level of uncertainty regarding the fuel price and also the unit revenue development, for many reasons. We see a similar capacity increase quite sharp, in Europe, more than 7% increase in the long-haul, in and out Europe.

Of course, the second quarter is a tricky one, because you see that capacity coming in at the time the demand is not very, very strong. So we believe we should be very careful for Q2 and that's the reason why we stick to our view that in the next coming quarters we would expect that the fuel bill savings would be significantly offset by the pressure on unit revenue and also the negative currency that I mentioned.

We're comfortable with our unit cost reduction target around 1% in 2016. I don't mean that it is easy, but we have the plans to achieve that number.

And of course we can confirm a free operating cash flow between €600 million and €1 billion. We will monitor closely the CapEx during the year, depending upon the cash generation from operation.

Of course, we're very pleased with the development of the first quarter, but we're still cautious on what will happen over the next three quarters. And we will also be cautious on the disposal side.

I mentioned that we have included Servair as a discontinued operation and it is possible indeed that we could have an operation during the year. Based on this cash generation you can expect a significant net debt reduction again in 2016.

That's it. It was a bit of a long presentation, but it was a lot to be mentioned in this quarter.

I'm happy to answer to questions now.

Operator, please you can open the questions.

Good morning, everybody. If I could ask three quick ones please and the first one on Transavia.

Pierre-Francois, you mentioned putting an extra two aircrafts in Munich. And I'm just interested in terms of to what extent do you need to understand the performance in Munich properly before making the next decision on another base outside of France and the Netherlands?

The second question, you highlighted 84,000 FTEs at the first quarter. Is it possible to give us a forecast or a planned number of FTEs by the year end?

And then the final question on working capital movements. Working capital has clearly been a strong point over the recent months.

And I wonder to what extent has deleveraging helped you manage terms with suppliers in terms of working capital flows and what is left to tap in that avenue?

The first on Transavia Munich, indeed it is our first base outside France and the Netherlands and for us it is a very important test. So we want to see the outcome of this operation before we make significant moves outside.

We have a clear idea. We have a timeline.

We need to comfort also the first success that we have in Munich. So we will increase capacity further in Munich in line with our plan and then indeed we'll be looking at other results for -- before we go to other places in the other locations in Europe.

On the FTEs, we expect indeed a further decline between March and December. You know that we're also in a seasonal business.

So you need to be a bit careful when you compare the quarter to another quarter which is not the same. I think that the minus 3000 that we have posted at the end of March compared to the end of March 2015 is on the high side.

But we expect of course at the end of December to be lower than where we were December 2015, maybe not in the same proportion. One of the key uncertainties that we have is that we have launched a new PDV of 1400 plus 200, so that's 1600 people in Air France which is starting now in the next few weeks.

And this PDV will go up to March 2017. So it's difficult for us to tell when people will be leaving the Company.

But let's say that about minus 2000 at year end is something which is a ballpark. This should be about it.

And then you had a third question about working cap and the cash position. I think you are touching on an unexpected issue for Air France KLM which is indeed, with the cash generation that we have, how do we make the best use of our cash.

Among the solutions, among the right decisions we could make, we can re-discuss with some suppliers the terms of payments to shorten the terms of payments on the face of a discount on the price. This is the sort of negotiation that we have launched.

You know also that we have PDPs, pre-delivery payments, with some aircraft manufacturers, with two aircraft manufacturers. And that's also another part that we could discuss.

It's a bit too early to enter into that sort of discussion or at least to commit. But we have a very high level of cash at the end of March.

And as you know, cash investment today is very poor. So we have on our to-do list a workshop on how to optimize and make the best use of this cash position.

Three questions please. Just on Servair, any reason why the decision was taken now?

And then just I guess timing of -- when we can expect the asset to leave the Company and whether or not you think it will generate a profit or will there be a cost? Secondly, just the capacity view, very good control.

But could you give some color for the rest of the year how you view it developing and in terms of regions and airline? And then just any comments in terms of the current demand outlook for quarter two, as much as you can see or can't see?

Thanks.

Okay. On Servair, well, there are rules, accounting rules, under IFRS 5 which make that when you have a decision which is made to lose control, because that's the accounting definition, it is to dispose all or part of an asset and that you have a good vision, a clear vision, a clear path to the loss of control within 12 months and then you have to record the operation as discontinued.

So that's exactly our framework, that is that we have today a decision in principle. We have a process which has been launched actually a month ago.

We have today offers that we have received. And we believe that it is likely that we would finalize with one of our partners an operation in a reasonable timeframe.

I mentioned that we expected to close that operation by the end of the year. I think that when you run a disposal process it's very important not to give any commitment or indication outside, because it creates only a hurdle.

But of course our target is to complete the first phase of that transaction by the end of the year. And there is no risk that there would be a cost or a loss associated to this operation; on the contrary, that's for Servair.

And then in terms of capacity, we expect for the full year to grow slightly our passenger business, something between -- something zero plus, let's say 0.5% area, something like that. Of course it's still subject to a decision that we can make on the network.

And you know that there might be adjustment. The different trend between Air France and KLM will be there for the full year.

And you can expect that Air France would be down probably around 1%, where KLM would be up 3% to 4%. That's for the full year.

Of course the summer time will be critical, because that's where you have the maximum production in terms of capacity. So that's basically our views.

I think that the trend that you see in ASKs for the first quarter by region is a fair reflection of what you would see for the full year. There should not be a big change.

I think that compared to what I just said it's clear that we have a big question mark on Brazil which is probably calling for more action. But that's basically broadly in line with what you've seen and then on the Q2 outlook, it's difficult to say.

I think that the market is oversupplied. There is no discussion about it.

We see additional capacity coming in. And for sure you should not take the very strong performance of Q1 as a proxy of the full year.

You should expect that the pressure will increase during the second quarter. So that's for us very clear.

Now, it's really difficult to say. The first indication is that April and May are a bit tough.

But you remember also that last year April and May were not very strong for us. So it's difficult for the year-on-year analysis to be too affirmative.

I think clearly we're very, very cautious about what could happen during the second quarter.

Yes. Just in terms of forward bookings, I just wanted to ask what you think in terms or is there a trend towards more short term bookings as some of your competitors are saying, i.e.

flights are booked closer to the departure date and that makes it more uncertain? And maybe the second thing, you made a list of many things which --congratulations on your outperformance in Q1 and retaining 55% of the fuel.

Maybe if you can try and rank them where you saw -- what actions were relatively more important to deliver on that. And then just finally, just so I understand, in terms of the disposal guidance you gave at the start of the year and reiterated here of between €0.2 billion and €0.5 billion, were you thinking at the start of the year that was basically Amadeus and Servair?

On the forward booking trend, yes, the behavior of consumers is changing. They go for more late bookings.

It's much more difficult than it was to anticipate what's going to happen in the next few months, sometimes even the next few weeks, probably also because many competitors are very dynamic in terms of steering and then you need to be much more reactive if you want to fill your aircraft with the best revenues. So it is much more challenging than it was two years ago.

It's not new. It's a trend that has started two years ago and now we see the full effect.

And I'm afraid it will not change overall. But anyway, today for the summer we have already a majority of the system which is booked.

So we have already some vision. But indeed the real unit revenue performance is made in the very last few weeks.

So that's why it's so difficult for us and for the industry to give you a clear view of what's going to happen, because indeed we see a change in forecast on a regular basis. On the retention of fuel what were the key measures?

It's not that easy, for sure capacity discipline. Of course it's a golden rule of the business that you know very well.

It's much easier to steer your unit revenue when you have a reasonable capacity growth and then you need to be smart. That is if you decrease capacity in a market which is totally oversupplied, you will not get any benefit in terms of unit revenue, because even if you decrease capacity, actually you don't improve your unit revenue.

So you need to choose where you need to add and you need to restore capacity. And I think we made huge progress over the last two years on this and especially our capacity to execute much quicker than we were.

We have a test and learn approach which proved to be quite efficient in terms of network adjustment. So that's a point I would like to make.

And when you see where we have restructured the network either in Asia, either in point to point either in Africa, South America, it is successful. So I think that we're quite good to adjust the network.

The second point is that we have changed our revenue management two years ago. Probably it took us a while to fully control the new tool, but I think that today it's giving very strong results.

And I think that we made again on that area, a lot of progress. And the tool is keeping the promise that was made at that time.

And last but not least, I think that also we're much more aggressive in terms of sales, hot spots, specific actions that we take on such and such markets. As soon as we see that the load factor curve is not in line with our expectation, we're really able to stimulate, to steer the market quite aggressively and I think that we're doing good.

But again, I would like to mention that the feedback that we get from customers of the products, it is very difficult to put a value on that, but it's very important. And when we see the resilience of the premium part, it's clear that the efforts that have been made on cabin configuration and more generally the product upgrade are paying off.

And then on the disposals, you remember that we gave a range, €200 million to €500 million, it's still a range. At the time, maybe at the time in February where we gave that indication, as you can imagine, we had in mind already the Servair operation which is not done.

But of course we have also Amadeus. Now we have completed a slot transaction, a small one, this year.

We have a few assets that also could be disposed, very small, but still we have some ideas. And then Amadeus and Servair are to a certain extent competing.

But selling the Amadeus shares is not very difficult. As you know, it is fully hedged, so for us it's as liquid as cash, to be very clear, whereas Servair is a much more sophisticated transaction.

It's an industrial transaction. It's not a financial one.

We're looking for a good partner. So that's another story.

So for us, it's very important to keep that flexibility. And again, depending upon the cash generation of the year, our capacity to create operating cash flow, the opportunities that we may have or not in terms of investment, that is for us an important dimension.

And we will fine-tune our final level of disposals depending upon the operating cash flow generation and the CapEx execution. So I think it's very important for a company to retain flexibility in terms of capital allocation and disposals are also part of the story.

And we're very pleased to have a backbone of disposals that make sense from an industrial point of view and then we have the flexibility on the Amadeus share that allows us to have a communication with you which is more flexible.

A few from my side as well, partly follow-ups. One, on the MRO business which indeed develops nicely, but if I look at the table it shows that profit excluding currencies was actually flat in the first quarter year-on-year.

Just a picture for the rest of the year, can we expect more underlying improvement for the business over the remainder of the year? And then once again on Transavia, you mentioned that you are watching the development there and base your decision for further bases on the success there.

What was Lufthansa's reaction so far in terms of opening new routes and to what extent did you have to react by adjusting your route portfolio? And does the performance so far match your initial expectations?

That would be very interesting. And then one on wage negotiations.

We now know about the succession plan from Mr. de Juniac.

Does that have an impact on the current wage negotiations? Are they effectively stalled and you are waiting for the new CEO now or can we still expect progress maybe even in the near term despite the CEO change?

And then just one follow-up on the booking trends. Competitors spoke about a sequential deterioration in the first quarter.

Did you also see that? Thank you.

On MRO I think that, as I mentioned, we're facing some issues in terms of supply chain which hamper a bit our profitability that was supposed to be a bit better. That's true.

And I mentioned also the structural changes that were ongoing and developing, I think, successfully the business. For the full year I think you should expect more or less the same sort of variation than we have in the first quarter, so more or less stable margins.

But indeed we're today striving to improve further the margins. However, we have now well above 5% margin, growing the top line aggressively and I think that's a sort of threshold that we're on for 2016.

On Munich, there was some reaction, limited reaction actually, from Lufthansa. But you know that one of the key points is that by the agreement that they have with their pilots Wings is not allowed to fly on Munich.

So as long as they cannot fly with Wings but only with Luft, their retaliation capacity is acceptable, I would say. And that's one of the reasons why we're in Munich where our competitors are Lufthansa and Air Berlin.

So I think today, as I mentioned, we develop along the plan. So of course we need to adjust our own networks, our own routes, depending upon what the competition is doing.

That's part of the game and that's fairly normal, but we do not see any stronger reaction than what we could have expected. And then on the change in governance and wages, yes, we're very pleased that the decision could be made to appoint a new CEO.

I know the name. I think it removes an uncertainty, that is of course very good news in these challenging times for the industry.

Of course we're not going to stop for, first, two or three months to wait for the new CEO to come in, then another three months to wait for him to make his opinions. So I think that we have ongoing projects and we carry on with the ongoing projects.

They are fully endorsed by the Board of Directors and the new CEO is kept informed of what we do, of course. But in the meantime, we execute the plans and you can expect that we will carry on ongoing negotiations and actions in terms of productivity.

Can I just come back to the labor situation with the pilots at Air France, because I think there were some reports in the French press of plans to cut pilot pay to take the missing savings from Transform? Can you offer any commentary as to whether that is ongoing and what reaction one might see from the SNPL?

And then separately, obviously there is debate about where you are taking Air France capacity next year which is obviously related to that, but what's going on with the aircraft orders and the 787s due or not due to come into Air France? And then as a final question, curious about the growth from the Transatlantic that you are seeing from Paris by Norwegian -- by La Compagnie and indeed OpenSky are upgauging their aircraft as well.

To what extent are you paying attention to this long-haul low-cost trend and to what extent do you think you might need to do something, particularly also as we see French Blue building on the overseas territories routes or planning to?

On Transform, you remember that we have entered into a phase of negotiation with pilots and the expiring date for negotiation was May 2. So we were unable to reach an agreement.

We put a proposal, a final proposal on the table, but the pilot unions were not willing to sign on that basis. So we were clear that to make an agreement you need to be two, to tango you need to be two, I think and we're not two.

Therefore, we will carry on with all our productivity measures on the different businesses and staff categories. And for pilots we will implement what we're allowed to implement on the basis of the court decisions that were made a few months ago and that were suspended during the time of negotiation.

So there is a few actions with that regard. The main actions are indeed decreasing the earmark of the uplift of the pay, the extra pay they get for night flights.

That is an uplift of 50% that should be reduced to 40%. That's one of the measures.

And the second measure is annualization of day offs which were per quarter and that will be on an annual basis. And then you have a few other measures that will not enter into this.

So it's clear that these measures, depending upon the schedule of each pilot, may indeed decrease their pay compared to what they have but for an amount which is not very significant. This is not an unexpected action.

This is something that was negotiated years ago actually and that failed due to the absence of confirmation of the agreement by both parties. We do not expect pilots to rush and say, oh what a good idea.

So of course we expect that there would be upset. They have already indicated that should we apply these measures, then they would start individual litigations on the belief that from a legal point of view they can contest the implementation of these measures and especially those with regard of the night flights.

The overall impact of this measure is about €20 million to €30 million per year and they obviously contest the implementation. So we expect that they will go to court on an individual basis to challenge the implementation.

Actually that's what they are saying. What sort of social unrest do we have at risk?

I think that, as you can imagine, if we believed that there would be a significant risk of a huge strike, we would not do it, because of course it would not be worth the gain. We believe that what we do is within the boundaries of what is expected from a reasonable management.

Also that's a very important signal to the other categories of staff which have already contributed through Transform and which are today either on negotiation or on execution of further productivity plans. So it's very important that we maintain a reasonable balance between the different staff categories.

So I'm not telling you it's a walk in the park. It's a tight judgment, a tight judgment vis-a-vis the risk we have of social turmoil and the magnitude of the reaction of the pilots.

That's part of it and that's to be seen in the weeks to come. In terms of Air France capacity in 2017 and the fleet, I think first we have concern that the 787 will enter the fleet as soon as December this year.

So the first 787 will be in the Air France fleet in December. Second one is coming in April.

And I think that's a clear message that we want -- we're ready to invest in Air France. And we want to, of course, improve the efficiency of the airline.

The capacity growth will be depending upon the productivity achievement. We made a very clear link between the productivity and the capacity.

You see this year in 2016 that KLM is growing much more -- is growing quite a lot, where actually Air France is decreasing slightly capacity. I think that that's consistent with a vision that should allocate capital where we can make money.

It appears also that under the current circumstances the network is much more profitable, including in Air France, than what it was a year ago, that's a fair statement. Our policy is not to play with [indiscernible] about capacity.

Our policy is to put capacity where we make money. So today, in the current world, it's clear that Air France network has improved dramatically; that's a reality.

But, however, in terms of relative terms, we need to allocate the CapEx where we have the best returns. And that's the reason why, for 2017, the capacity will depend on the next discussion that we will have.

And it's a goal for, let's say, for late summer. But if your question was are you going to for the plan or whatever, no, I think we stick to that view that competitivity will be the driver, competitive position will be the driver of capacity growth, that's what I wanted to mention about it.

The third question was about growth in SCC. Yes.

No, these moves of the low cost company on the long-haul is not something that we disregard. We're still quite skeptical about their capacity to generate a sustainable and profitable business in this market.

But we need to be careful, because sometimes you miss something. And, at least in the summer, for sure, they can make some money in some good markets like Paris, even if today local flows to Paris are not what they were one year ago.

On the basis of the attacks, it's a bit different. And based on our own experience, it's very, very important to have a strong connecting contribution at Charles de Gaulle today if you want to run successfully a business.

That may explain also the difference with some other players active in France. So for sure, it is something we should not disregard.

We need to be careful. And in the summer we expect that it will hit, to a certain extent, our unit revenues.

So we're not talking about a huge capacity this year. But if there were growing capacity in the next few years aggressively and we know they can, if the model is proved to be right, then that would be definitely a more serious issue.

We're not too worried in the very short term. It is something that we're scrutinizing.

And if the model proved to be efficient, then of course it will call for other actions. But, for the time being, it's still to be demonstrated that they can run the business sustainably profitable.

And of course in July, August there is no question mark. But then you have another 10 months in the year and without connecting traffic, it's a bit of a challenge, but that's something to be seen.

Just three please. First, it's specifically on KLM.

I noticed that the short-haul load factor in Q1 was up 7.5 percentage points which did seem particularly strong. So I wonder if you could mention any specific reasons behind that?

Secondly, just in terms of looking at the trading by segment. Some of your competitors have mentioned that the main weakness they're seeing is on the long-haul, non-premium, particularly inbound on, for example, tourist groups in markets like Japan and the U.S.

and perhaps a little bit more resilience or less pressure on the corporate booking side. I wonder if you could confirm those are the similar trends that you're seeing?

And finally, just to get back to the discussion about the Air France capacity growth in 2017 and beyond, am I right to think that the plan that had been mentioned earlier in the year where it could expand its long-haul network by 2% to 3% annually, between 2017 and 2020 would be still on the table if you could reach appropriate agreements on productivity with the pilots? Thank you.

On the KLM load factor in the beginning of the year on the medium-haul, yes indeed, I think it's an impressive success. And the traffic is there.

The local flows to Amsterdam are doing good and also the medium-haul is doing good. So I think that, again, it shows that there is a strong potential in this market.

I don't know Eric, if you want to mention something specific about the growth of the medium-haul of KLM in the first quarter and the load factor.

Mainly it's just because of the network and indeed a little bit more aggressive pricing also was implemented. And of course new [indiscernible] we see that KLM's [indiscernible] new fleet is doing extremely well; also very much appreciated.

So that all helps to improve load factors. And we've been pleased by the demand of the traffic.

On the long-haul yields, yes, I mentioned that our premium business was more resilient than the leisure one. And you're right to point out that AF-KL and especially Air France has probably an above average exposure to the corporate business, that may explain also, indeed, part of the better resilience of our performance.

We've heard that -- some say in the market that groups are definitely under pressure, that's definitely true for Japan. That is true, to a certain extent, for China.

But we can't see any specific pressure on groups from North America. Indeed we see lower local flows to Paris from North America, but it's difficult to make any distinction between groups and individuals.

So I think, yes indeed, the leisure market is hit by the geopolitical events in Europe and especially in Paris. But indeed our corporate portfolio is resilient.

And then on the capacity growth, I think that AF-KL as a Group is still looking to grow its ASK, its production like 2% to 3% a year. Yes, that is definitely something we want to achieve.

The contribution of Air France will be definitely driven by the productivity we can get. So it's a long term view.

It is not again a bargaining position. It is a long term segment that we want to allocate our resources and especially our financial resources and fleet, to the business that can make the best use of it, of course, in terms of returns, also strategic content and that should not be disregarded.

So that's important as well. That's why it's so important that we reach an agreement with Air France.

But again, if you add up all the productivity measures that we have today engaged in Air France including, of course, the FTEs cut, but also the restructuring of some loss-making activities; which is not totally done, the projects that we're processing, the G&A reduction project, the sales force restructuring project. We have a lot of ongoing projects.

They are giving Air France a boost in terms of productivity, so this will allow for further growth. But the question mark is how much and that is dependent upon our success in signing agreement with crews because that's obviously the core question.

Just back on the labor side, with the failed agreement with the pilots, how do we have to think about the scope clause which, I think, expired end of March and it was put on hold. Will that be now not prolonged and you will implement the measures you have hinted like producing at lower-cost partners?

And then secondly on the CEO succession, what was the rationale to choose an external candidate and not somebody from within the organization with whom the transition and continuation of the restructuring might have gone a bit smoother? And then lastly on the recent press headlines regarding Singapore Airlines potential collaboration with Air France, what is the background there; what are you talking about exactly?

Thank you.

On the last one, we don't comment on this sort of thing. It's a business; everybody is talking to everybody.

And if we were commenting each time, there is a rumor about a discussion it would be a full-time job. So I won't comment on that.

On the scope clause, yes, it has -- the scope clause, excluding the Transavia arrangements which are still on, but for the rest the scope clause has expired at the end of March. Given no new agreement was signed, there is no scope clause any more.

It doesn't mean there won't be any, but there is none today and it's part of the discussion. It is something that pilots are very sensitive to.

They are very anxious that we should not de-locate part of the business to another company. The other company starts with KLM actually, because there is a big discussion about the production balance, that is the ASKs which are produced by KLM and by Air France.

So that's part, of course, of the discussion. But today we do not have any intent to make an aggressive use of this scope clause.

So let's say that it's a flexibility that's been given to us. But again, we're totally committed to maintain and to develop the relationship with pilots.

There's clearly room for improvement. We need to improve our productivity and we need pilots' contribution.

And that's the reason why we move on with Transform. However, we do not want to break or to lower the level of trust between the management and pilots.

And I think that the scope clause is a very sensitive topic. And we do not see any reason now why we should aggressively use that new flexibility.

So that's why, for the time being, we believe that we can leave -- with that situation, leave that point open and that obviously will be one of the first topics to be renegotiated with pilots. Of course and it makes a link with the new CEO.

One of the key topics on his to-do list is of course to improve the relationship within Air France with pilots. And I'm sure that it's good for him to have a few topics to discuss and the scope clause will be a key one.

To be very candid on the CEO succession, first it's clearly a decision of the Board. And I'm not aware of all the pro and cons.

I can only say that I know personally Mr. Janaillac because I've been working with him in my previous life in Veolia on the transportation division.

He's an excellent manager. He's very well regarded by his teams and has been quite successful in having Transdev rebounding.

So he's well known in France. And, again, personally I know what he has been doing.

One of the key assets that he will bring is a fresh eye. He will bring a new name, a new face in the discussion, especially with pilots.

And I think that's a very positive point to help to restore a new dialogue and new discussion with pilots. And I think it may have been one of the key points, looking for an external candidate to fill the position.

I had earlier the question about are you going to stop or to put on hold your productivity or your wages discussion. The answer is clearly no.

We carry on. We made the decision yesterday, fully supported by the Board, to go for the implementation of Transform.

And I think that's the best demonstration that the restructuring will not stop, that tough decisions will be made in the next few months to make sure that the Company is running in the right direction. And then the new CEO will come, at some stage.

And of course, he will make the decision he believes are appropriate. But for the time being, we execute our plan.

Three questions, although hopefully one is tidying up. I just was interested to find out a little bit more about the network changes you've made, particularly the way you've cut capacity or indeed cut routes and whether you could give us some feeling or elaborate on how much of a loss that has removed from the Q1 numbers?

Secondly, on Transavia, just to get a feel about how we could expect to see unit revenues develop this summer, could you give us some details on, in the Q1 period, how much of the route structure in Transavia or seat capacity was immature, i.e. had been operating for less than 12 months and what that would like in terms of the Q2 and the Q3 summer schedule?

I assume it increases with Munich, but it would be interesting to find out how much that increase is. And then, very finally, a longer term question.

Patently you seem to be reaping the rewards of capacity discipline with that RASK reduction being so low, but on the basis of low growth. Given what your competitors are doing, they seem to be focused more on market share and growth rather than, maybe, profitability for the long term, how long can Air France KLM afford to stand by and cede market share?

Or is there a point or a tipping point, where you think you'd need to go back in to maintain market share position?

On the network adjustments, I think that we carried on, in the first quarter, with something that has been very successful in the past and was successful again which is a point-to-point restructuring. The ASKs are down 6% on that part.

And you see that again the unit revenue is rebounding quite heavily, because we nearly maintained our topline while decreasing capacity by 6%. So it's quite efficient.

We did also decrease capacity in Brazil. So we made some right adjustment in the right time.

Well actually it was a bit late, but that proved to be successful. We also decided to re-allocate some aircraft, changing the allocation of some aircraft from different routes to best fit the demand that we have, especially between South East Asia and North Atlantic.

So that's a long stream of small actions actually which have delivered -- with the exception of point-to-point of Brazil which have delivered this improvement. On the Transavia unit revenue, it's a bit difficult for me to give you the percentage of routes of less than 12 months.

Indeed, to ramp up the revenue at the nominal terms, we consider that we need about 18 months. We monitor the new routes on a quarterly basis, to see how they are ramping up to compare to business plan and it is really something you see quite a lot.

I think that 2016 is not an easy year, because even you have the growth in Transavia France which is obviously a challenge, but what you don't see is business shift within Transavia Netherlands which is cutting, aggressively, its charter capacity and opening new routes on a B2C model. So it means that they have also to face that changes and I think they are actually doing very well.

So I'm not sure that you should expect, further down the year, a much better unit-revenue development for Transavia, of course with a lot of growth in the summer. So I think that you should expect unit revenue in Transavia to be more or less in line in the year with what you've seen during the first quarter, obviously excluding ROPS.

And then about the capacity discipline and the choice between unit-revenue development and market share. I think that, first, there was definitely room for improvement in our network and there are locations, there are routes which are totally unviable.

And we had to make decisions, clear decisions, somewhere dictated by the environment like Japan, like Brazil. Our view is that we need to keep -- we need to protect our market share in the key markets.

There are markets where we look, together with our partners, that's the case of North Atlantic, when you see that Delta is growing quite a lot. I think that on North Atlantic we had any way to rebalance the production between the two carriers.

So we had a very strong year and they had a strong year; overall our market share is also to be considered with our partner. And then, if you look at the markets, our key market and if you look especially at the Dutch and the French market, we're not losing market share.

We're very strong on our domestic market. We're actually even much better than our competitors in their respective domestic market.

And we're not losing market share in these key markets for us. Now it's sure that if you look to India, today in India, for us it's very difficult to maintain a sustainable business so we're not going there and while the capacity of the market is growing.

So the overall market share will be -- could be decreasing. But for the addressable market for us, we're very cautious about our market share.

And, again, we expect that in the future we will be able to catch up with the growth of capacity much closer to 2%/3% per year which is perfectly in line with what we need to do on the addressable market for us. Again, the market of ASKs in China is not very relevant to us.

And it's true to say that in 2016 we're a bit on the low side, but for us it was very important to improve our returns. And I think that this policy has proved to be very efficient.

And can I ask just one follow up; what is the planned growth rate for seats in Transavia for the full-year basis now?

The growth for ASK?

ASK or seats whichever is easier.

Okay. ASK for the full year is expected to be, for Transavia, about 15%.

Just a quick one. I'm just trying to work out on the cash flow statement, you say you've taken a €146 million provision to get rid of, I think, 1600 employees.

That feels like a very high number per employee. I was just wondering if you could talk to us about how you got to that number?

And then also if I look on the cash flow statement, the provisions, whereas I would expect you to be adding that €146 million back to net profit, you seem to be taking off €23 million. Is there a big provision release in the numbers somewhere or am I just looking at it wrong?

I don't quite understand. Thank you.

I can confirm there is no big provision release in the numbers. To be totally transparent, I need to mention €40 million release, not in EBITDA, EBIT whatever, but it's in the financial income which has to do with the cargo fines.

And you remember that we had accrued interest charges against the cargo fines and we released that provision because the decision has been definitively cancelled. So, there is no reason to maintain the provision so it was released as a provision.

It has no impact whatsoever on operating income whatever. I use that opportunity to mention that there is no one-off in our numbers; there is no one-off, no positive one-off or trick.

I know that some of you are a bit skeptical about the numbers, but there is absolutely no one-offs in our improvement. On the provision, indeed we have €146 million provision which is made of actually a net, because we have a cost to cover people leaving.

And then we can, of course, get some provisions back which were actually reserved for the retirement time. So the net is €146 million.

The net cost per capita is about €110,000 for ground staff and a bit lower than that for cabin, because of their career patterns. So let's say, as an average, a bit more than €100,000 per capita which is fully in line with the cost that we have incurred in the past.

So there is no difference compared to the previous PDVs of Air France; it's always more or less a few thousand euros, because it depends about the population that is addressed, because you have simulation of the cost base on the relative age of each and every person you expect to go through the plan. But the average is again a bit more than €100,000 which is fully in line with what we've seen in the past.

This is obviously a non-cash provision; it has no impact whatsoever on the cash flow statement. But, of course, if you want to follow up and to go down with the team on the cash flow statement, we can arrange a specific call to make sure that you retrieve your numbers.

Just one for me and it's in relation to the cost-savings targets, particularly for 2016 and 2017. And it was mentioned in the past that of the savings target for Air France, about 35% of these savings have yet to be identified.

So I was just wondering if you could update on that, particularly for the 2017 year, that would be great. Thanks.

I think that we're moving forward on the key projects that are driving these savings, namely on the crews, the new CLAs. And if you take for the restructuring, HPO which is a KLM project, G&A which Group-wide project including Air France, we're developing on track.

There has been no significant upgrade for 2017. So for us now the key metrics for 2017 are the finalization of the CLA.

And here you have the KLM discussion on ground and cabin. And for Air France the cabin discussion, because the agreement is falling due in October.

So until that time you should not expect very significant upgrade of the 2017 security we can have on the plan. We're really working, we're in the meantime [ph] for these 2017 numbers.

I think it was the last question which is fine because we're coming close to an end. So thank you very much for your patience and also very interesting and stimulating questions.

And we can obviously follow up with each of you with the IR team. Thank you again for attending the call and see you soon.

Bye, bye.