Earnings Call: Q4 2019

Feb 20, 2020

Ladies and gentlemen, good day, and welcome to the Full Year 2019 AF France KLM Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Benjamin Smith, CEO of Air France KLM. Please go ahead, sir. Good morning, ladies and gentlemen. It's Remy Casier, and I are very pleased to welcome you to this presentation of Elfron's 2019 annual results. I would like to reiterate how happy I am to lead a group like Alfron's KLM with 5 strong airlines and such immensely talented teams. Before coming here, I could never have imagined the amount progress we would have made in just over a year. It's truly incredible, and I'm so proud of all of our 85,000 employees for their continued dedication and commitment. So those of you who are following, via video and looking at the slides, I'll just walk through the pages so it'll be easier for you to follow. So by moving now to page 3, I'd like to briefly review the highlights of 2019, which employee representatives. As you know, we have been working diligently to embed 4 new key pillars in our relationship with our employees at every level of the organization. And that is trust, respect, transparency, and confidentiality relationships we have been building with our employees have proven to be fruitful in several ways. First, we were able to maintain labor stability during a a long period of nationwide industrial action in France concerning pension reforms, whereas the services of other transportation companies were severely impacted with extensive disruptions and cancellations. For the first time, Safranz was able to operate a full schedule during such nationwide disruptions Outside of the mandatory measures we were obliged to take due to industrial action on the part of air traffic controllers. I'm very proud of the commitment from our staff to our company and to customers during this period, especially since unlike other national companies affected in our industry, We operate in a fiercely competitive marketplace with other global carriers looking for any opportunity to go after our customers. Our employees doubled down and worked hard to ensure that vital customer trust remained intact. 2nd, in 2019, we signed 37 labor agreements across LCOS and KLM, And these are a huge value to the group because they give us the necessary flexibility that is so vital to our transformation plan. We were able to remove the cap on the fleet size of Transavia Fras, which in 2020, we forecast will grow beyond 40 aircraft. We now have full flexibility when selecting and optimally configuring our aircraft. The natural productivity gains this fleet renewal will bring our enormous new efficient aircraft optimally configured decorate the most profitable traffic, we'll provide Alfon as the necessary tools to embark upon its transformation and will secure unit cost improvements. This presents a significant opportunity to improve from today's complex and non optimized fleet situation, where aircraft is unique amongst the European carriers. Operational reliability has also been a strong focus for us as the fundamental building blocks must be in place before embarking down more ambitious paths. At El France, we laid the foundations for a significant improvement through a very successful program called cancel the cancellations. The program included restructuring our network and schedules, and increasing flexibility in spare capacity during peak periods. Operational teams at both airlines worked relentlessly to ensure We got aircraft off the ground on time. Collectively, operational measures drove a major improvement in our KPIs, including a very high completion factor nearing 99% for off life and a big increase in our on time performance. ALM remained quite strong in operational performance throughout 2019, despite being negatively impacted by unforeseen events and now France finished 2019 ranking 5th in Europe and 7th globally. This is a big upswing from previous years. This is good, but I believe we can do better at both airlines. Despite these significant achievements in 2020, I strongly believe we can drive further progress, and we will start the phase out of the Airbus A380 at Alfa's. In tandem, we will redesign our bank structure at Valet Chaldego to become more operationally robust, and we will continue in our quest for simplification. The 3rd and final highlight I would like to stress is an enduring commitment to sustainability. Over the course of last year, we met with several analysts and with our investor base and shared our thoughts on the importance of sustainability in our industry. It is our goal to make every trip a responsible one by steadily reducing our environmental footprint. Since 2011, we have achieved a near 22 percent reduction in our CO2 emissions per passenger kilometer and a 23% reduction in the energy consumed by our ground processes. In 2019, we stepped up our efforts by embedding sustainability in our culture and launching a wide range of new impact initiatives to create awareness and reduce our environmental footprint. And last but not least, the major fleet orders for next generation aircraft for our long haul and medium haul fleets placed in 2019 will drive a substantial reduction in emissions over the coming decades. I'm now moving to Page 4. The primary financial KPI targets were achieved in line with our guidance. The group carried over 100 and 4,000,000 passengers in 2019 and saw its revenues further increase to over 1,000,000,000. In 2019, the Efrance KLM group posted an operating result at 1,140,000,000, after a fuel bill hit and with particularly strong pressure on cargo unit revenues. Titlehek will go in to further details later. Moving on now to Page 5. Our value creation model shows the critical resource we rely on in order to fly our customers around the world and create value for our stakeholders. It highlights the importance of our amazing assets. 1, our people 2, our 3, very powerful brands 3, our network with France as the number one inbound nation Worldwide, and Skippall has the best in class European Connection hub. Our strong partnerships Across the Globe number 4, and number 5, a robust financial structure 6, our commitment to sustainable development goals by integrating stustainability into every aspect of our business model and operations. We are committed to creating different forms of value for each of our key stakeholders in everything we do, including our planet and our society, these forms of value are of course intimately connected as we develop more integrated thinking within the company, we will be better able to demonstrate how these forms of value relate to each other. Moving now to page 6. The first stakeholder I'd like to address is our 85,000 dedicated and passionate employees. I can't stress this enough Our staff are the group's number one asset, LCOS KLM strongly believes that a diverse and inclusive workforce has a positive impact on the performance of the organization. We continue to support all forms of action to encourage equal opportunity. 1, seeking equality between men and women 2, celebrating LGBT Pride, 3, benefiting from the global perspectives of our culturally diverse employees, the employment of young people and seniors, and the transmission of knowledge and skills. For the employment and recruitment of persons with disabilities. Secondly, we want to make sure that we remain the best place to work every day. We continuously invest in skills development with a yearly average of 40 training hours per employee. We are monitoring our efforts through our employee promoter score, which soared by 15% over the course of 2019, as well as with very strong appreciation scores being awarded by our customers to our frontline staff. Lastly, our employees want to work in a company that is responsible. They are our ambassadors advocating hard for sustainability. Over 5000 of the group's employees are actively involved in volunteer work, skill sharing, and donation projects by the friends of the Elfhouse Foundation Network, ALMs Williams of Support Foundation, and Transavia's Peter Pan Holiday Club. It is amazing how many innovative ideas we get from our 85,000 employees on what we can do to remain sustainable over the long term. Moving out at H7. Our customers are at the forefront of everything we do. We are accelerating improvements to our onboard product. The Efhof LongHawk business class cabins are all being equipped with full flatbeds as quickly as possible. And Wi Fi connectivity is currently being installed on the entirety of the KLM and LCOS fleets. We forecast the completion of both fleets next year. These product upgrades are an absolute must to retain our position in operating best in class customer products. We strive for excellence by providing our customers with a seamless travel experience. This was reflected in a record high level of customer satisfaction in 2019, for Alfons with a net promoter score of 27 and KLM in a steady state with a superb net promoter score of 41. Finally, we are continuing to challenge the status quo by addressing the growing awareness of customers in our home markets and around the world. Some examples, KLM is the 1st airline in the world to have introduced the fly responsibly concept While El France has implemented drastic measures to reduce its environmental footprint, like the replacement of all single use plastics on board, as well as full CO2 compensation for all French domestic flights. Moving to Page 8. A reminder of the strategic plan that we outlined in detail during last November's Investor Day underlying this is in an ambitious investment plan with 1,000,000,000 being invested over the next 5 years, much of is earmarked for our fleet renewal program and products for our customers. This is also vital for the career prospects of our employees as well as to maintain our leadership position in terms of sustainability. Ultimately our strategic plan drives financial trajectory necessary to reach top financial performance. We have set a strategic financial target for ourselves to reach in 5 years' time, an operating result of 1,000,000,000 and an operating margin of 7% to 8% with part of the excess returns to be paid out to shareholders in the form of a dividend. I fully recognize that shareholders should be rewarded for their investment and thank them for their trust in our people, company, and our strategic plan. Moving to page 9, we We have already spoken about how integrating sustainability into our different businesses and operations contributes to achieving our sustainable development goals. I'm truly proud of the leading industry position we have taken as a group, a benchmark of the leading rating agencies on sustainability clearly shows that the LCOS KLM group has the highest ranking amongst its European peers. This is also recognized through our number one position on the Dow Jones Sustainability Index Worldwide. We are meeting the needs of the present without compromising the ability of future generations to meet their own needs for LCOS and KLM. This means that we care about our customers and the people we work with, we aim to minimize our environmental footprint and we strive for sustainable business results and development. Moving now to Page 10, my views on 2020, we have seen relatively modest industry capacity growth with sensible behavior from the key industry players. The prolongation of the Boeing 737 MAX groundings and the collapse of several smaller market players. This led to a good performance with positive unit revenues in January. However, recent developments regarding coronavirus have impacted the demand outlook, especially in the Asian network. Our sympathies are with our employees in China, as well as with our partner, China Eastern in these very difficult times. It will come as no surprise that our Asian traffic flows have been impacted swipes to the Chinese mainline, mainland have been suspended and demand to other regional destinations has softened Though we are doing all possible to accommodate our customers affected, our teams estimate the impact on our operating result at between 10,000,001,000,000 through the end of April 2020. Tadalajic will give further details on the financial implications of coronavirus. The fuel price has recently decreased, linked to coronavirus, and the fuel bill for 2020 is now expected to be 1,000,000 below 2019. So three key priorities for 2020, First, the execution of the transformation underlying the strategic plan. As Frederic will explain, the structural measures at Elkhart are on track for implementation this year. We are also pursuing our fleet renewal program with the phase in of 4 Boeing 787s and 5 new Airbus A350s, 2 of which are linked to the recently announced free order to replace 2 Airbus A380s. In 2020, we will exit the last of our Boeing 747s at KLM, contributing to the simplification of our fleet portfolio. We will also continue to restructure the French domestic market as planned, while phasing out the remaining ATR turboprop within the top REIT. The Evolve Transatlantic joint venture between FSAS KLM Delta and Virgin Atlantic took effect January 1st this year, and I expect to see the first positive results from our reinforced partnership now that our joint commercial and revenue production teams are going full steam ahead. In conclusion, very proud of our progress we achieved in 2019. While we start 2020 with a challenging situation surrounding coronavirus, I firmly believe the Alpha KLM group is nevertheless in good financial shape to withstand this unfortunate global epidemic We continue to make sure that everything we do is logical and in line with our future plans. We are focused on following our ambitious roadmap and we are fully committed I'd now like to hand over to our CFO, Tarique Hajier for a presentation on the 2019 financial results. Hi, everybody. So I propose you move on the page 12 of the presentation. To speak some minutes about the Q4 results and the global results for the year 2019. 1st Q4, an operating result of 1,000,000, an improvement of 1,000,000 compared to last year. Most important point is, of course, the unit revenue development. We have indicated the beginning of this quarter that we were expecting a slightly negative unit revenue for the network passengers. And it is in fact the case we have during last quarter of 2019, a network passenger unit revenue of minus 0.2%. So slightly negative, accordingly to the expectation. Since last quarter, the last year is good in terms of unit cost, unit cost decrease is minus 1.5 percent, which is supported by cost efficiency measures and the first impact of the transformation plan in 2 Air France. So all in all, thanks to this good performance in terms of unit cost, which that I get we gave you beginning of 2019 to have a unit cost for the full year between 0% and minus 1% globally, the number is at minus 0.9%, which is in the best part of the range. The last quarter, we see the evolution of the net debt between December 2018 and December 2019 as expected also. And, I think as we promised to you at the beginning of the year 2019, we are is net debt under control. It's a very slight decrease of EUR 17,000,000 to be also a notice during this quarter. The good of more of the unit revenue in Transavia at +10 percent. That's clearly a very good result. And, but I will comment on that ability to earn the disaster in cargo when we have a unit revenue of minus 17% which is, of course, Brahma. Forces industry. I go page 13, the global number, EBITDA 800 67 for the quarter, an improvement of 8% compared to last year operating result 96 compared to 53 last year, operating margin from 0.8 last year to 1.54 this quarter of 2019, and net income from the minus 200 the last year, 4th quarter to +156. For the year 2019, part of the explanation in the net income is the reverse of some temporarily stronger dollar impact, which have been taken at the end of the Q3, but you remember probably that the value of the dollar at the end of October, September, sorry, 2019 was extra strong. So it has impacted the net result for the 3rd quarter and we have now the revert of that. I move to page 14 when you have the development of the performance business per business. Materance is more than okay compared to last year's improvement of the operating results. 43,000,000 operating margin at 7.7, improving by 3.8, so I think it is a good end of the year 2019 for the month of business unit. Transavia, I have already indicated a good performance in terms of units with a new plus 10% capacity, a bit disappointing, but you know that we have some operational issue mainly at Transavia France due to the training of the pilot. This program will be progressively solved during the year 2020, which means that at the mid of 2020, Transavia France will resume 2 digit growth around 10% for the summer. But all in all, if you merge together the 2 trallaria OLAND and France, you see that the operating margin is improving compared to 2018 by 6 points which is also more than satisfactory. The network, clearly, 2 different evolution very difficult for the cargo with unit revenue at minus 17. And as expected, slightly negative unit revenue For the passenger activity, all in all, the operating margin is almost stable, but clearly it means that the margin is improving from the passenger and decreasing for the CAGR. Actually, I move Slide 15 the split of the unit revenue during the 4th quarter, several amounts which are important to be noticed. I think first one, very good performance in terms of RASK concerning the French domestic market. Of course, partly explained by the reduction in the capacity. We have already indicated to you that we are planning from 2019 in 2020 reduction of capacity in the range of minus 7% for each of the 2 years. So it explain why for the q44 2019, you have seen dilution impressive reproduction by the way of minus 12% in the capacity for the French domestic network and of course, such an evolution is supporting the positive to welcome the evolution of the unit revenue at plus 8%. This is the same also for the medium haul hubs, which is a bus activity at triple at charge the gold concerning the feeding of the long haul flight. When we have a stable capacity, minus 0.2, but very good performance in terms of unit revenue at +4 percent. Total loan goals has is slightly negative minus 1%. It's mainly explained by North America and Latin America, Latin America, this is not new, you know, the impact of this long lasting crisis in this part of the world. And North America, a bit of tension to be honest between the growth and the development of the unit revenue. Asia was still not too bad, but of course, it has changed since now and Africa, Caribbean, Oceans, Okay. To also, to be considered is the fact that the premium RASK is at minus 3% when economy is at 1%. It is a scheme a bit different compared to what we had in the last quarters, which is clearly play. First, there is a mix effect in terms of network because the, the short haul is growing less than the long haul So you have the normal mix effect in terms of unit revenue. And it's also true for the premium. So it explained probably one point out of the 3 point of decrease. And the rest is clearly explained also by the level of competition during this quarter. Mainly on the routes to North America and Asia and many also out of Paris rather than out of the am. I moved page 16 just to elucidate the crisis in the cargo industry during the last 12 months with an industry, which is developing, if you look at the traffic between York and of the world, a decrease of 5% of the freight, of the chargeable weight of the freight So it is clearly one of the worst year in terms of evolution. In such an agreement, not a surprise to see the unit revenue going down. It is a case for the Q4 with minus 17%. The behavior of Air France KLM is not so bad, we have been able to keep or even to increase slightly over market shares in such a difficult environment. Without saving unit revenue was than the rest of the industry. Which means that our strategy in terms of pricing and connection to clients is not so bad, but all in all, Danny, that this cargo market is extremely difficult during the year 2019. Transavia is seeing globally the Q4 and the global year are both positive, a part of the small issue concerning some operational difficulties in Transavia France which will be solved quite soon. The unit revenue is positive in Q4 is also positive on the full year and the margin is solids for the 2 carriers. On top of that, as you know, some traffic rights have been granted to Transavia between France and Algeria, which is also giving to this company, a good opportunities for development in the next year. Matter loans, I told already it was a solid Q4 with the margin at 7.7 improvement of 3.8 compared to 2018. Clearly material. It's a good performance like taking costs for the full year. The performance of the amount is more than okay. Operating result is at EUR 260,000,000, an improvement of EUR 46,000,000 compared to the year 2018. It is true for all those segments. It is true for airframe, from engine and also for components. So I think it is really it is really a real and a remarkable improvement. There is no One of BNCs is improved amount as the order book is still quite high, of course, above 11,000,000,000 which is close to 4, 5 years of activity for the 3rd party activity of the maintenance of France KLM and Zewodchi is estimated at 7.6, which is better also than the year 2018. So globally, Matt announced, ready to continue to move into the right duration Q44 unit cost minus 1.5. Clearly, it is more coming from, from Air France than for KLM, but it's normal due to the was basically different between the two companies. So because we can't see the first effect of the transformation plan, launched by Amerigail in Air France. And we expect, of course, a similar evolution for the year 2020, but I will come back and see the unit cost of view we are for the next year in some minutes. So all in all, for the Q4, Page 20, the normal waterfall outlet display solution of the increased in 2018, 2019. It is a bit of strange configuration because you see a very big impact of the cargo with I would say, so the cargo impact is negative to close to EUR 100,000,000. Passampshire is slightly positive. And in fact, it is thanks to the very good performance in terms of unit cost. That we are able to compensate to more than compensate. The impact of the cargo deterioration in 2019. I move page 21 Just to give some indication for the full year, so for the full year operating result is 1 141, it is decreased compared to last year, explained in some main 7,000,000 fuel cost, cargo, mainly, which has the most negative impact for the year 2019 18 compared to 2018, operating margin is at 4.2 net income at 1,000,000 The WOCI is at 8.5. We continue to control correctly. My favorable ratio of adjusted net debt on EBITDA, which is at 1.5. It was in line with what we gave as a guidance at the beginning of the year 2019 and the same as for the unit cost. Page 22, the split of the margins between Air France and KLM for both the Q4 and the full year. If I go first to the Q4, we have Air France with an operating result of minus 20,000,000 in KLM at least 120,000,000. The improvement is a bit higher in Air France, but as you know, the gap is still quite loud between the two carriers. You remember the discussion we had during the investor, the present and concerning the full year Air France is at EUR 280,000,000 of operating result, KLM at 853. Deterioration is stronger into KLM minus 138, but you have also to keep in mind, of course, that in 2018, and front has been hit by the strike for a global impact in the range of 1,000,000, if you take into account the impact of the strike and the variable income. So all in all, I would say if you take into account this correction, we can almost say that the performance between the company in terms of evolution between 2019, 2019 is similar. Page 23, the waterfall, in terms of operating results between 2018, 2019, Again, a very large impact of the cargo, which I was very new configuration. We are hardly see something like that in path, I will say, the fuel price ex currency impact, which is also for EUR 200,000,000 impacting negatively as a operating result. And again, we are mitigating this to quite strong negative impact by the good performance of the unit cost, which is providing EUR 200,000,000 positive in terms of operating result evolution between the 2 years. Page 24 concerning the evolution of the net debt. As I indicated, the beginning of the presentation, we have a net debt, which is stable between December 2018 and December 2019. Only EUR 17,000,000 of difference between the 2 years. It's really a it's really stability and the ratio, adjusted net debt on EBITDA, most likely from 1.4, end of twenty 18 to 1.5 to 2019, but it was exactly what we promised. To the market, in all guidance. I come to probably the most difficult part of the presentation, which is the outlook. Concerning the outlook, I am Page 26, and I will try to speak a bit about the impact of the virus. We were 1st, in 4, relatively happy with Jan results. In terms of January result, we had, you have seen the press release on the traffic as a traffic was going well. And the first calculation concerning the unit revenue also show a positive unit revenue for the 1st month of the So clearly, the situation was relatively, I would say, and in line with the first indication, we give to you concerning the situation of the balance between demand and supply for the first quarter of 2020. Of course, everything has changed the beginning of Feb with the first news coming from China. And we have seen, which is not a surprise, progressively, the long haul forward booking load factors deteriorating progressively and they are now clearly negatively oriented. You see that on the slide where accordingly to the last that the variable, we are making long haul forward booking of minus 3 for Feb minus 5 for March, minus 4 for April, and minus 3 for me. Clearly, such that are going into the wrong direction. And we have, of course, restated Automation of the unit revenue for the first quarter, which will be, of course, negative. But what is really strange is to have observed such a move in our expectation after the first info. Concerning the development of the virus. 2nd, we based on this info, are trying to estimate the impact economic impact of the, epidemics on revenue and on operating results. So we have taken assumptions because we cannot evaluate many scenarios and we are taking as assumption that we will continue to suspend the operations to China in Feb in March and then will be a progressive resumption of the operation starting from April. So based on that, we searched this assumption We estimate for the time being the economic impact at the operating result level of the crisis to something which is between minus EUR 150,000,000 and minus EUR 200,000,000. When we make this calculation, we take into account the loss of revenue, both in China, but also to Asia, of course, it is not only China, which is concerned that we also see some impact in China. We see also some impact in connection. And connectivity at both Air France and KLM hubs. And we are also taking into consideration operation. For example, you stop operation. You have some savings in terms of cost and taking all that together, we have the impact between minus EUR 150,000,000 and minus EUR 200,000,000 at the operating result level for the period, April 2020. Which is more or less, if you consider that the period is 2.5 months, something a bit lower than 100,000,000 per month. If you want to make your own calculation based on different assumptions. 2nd, we have also to take into consideration, if you build your model for the full year 2020, the fact that, as indicated already by Ben, the fuel bill has changed a lot during the last weeks. You remember that we were initially when we discussed the result of the 3rd quarter, we're initially having in mind an increase of the fuel bill between 20192020. Not so large, to be honest. It was, I think, something in the range of 1,000,000, but at least a few bill was expected to increase between the 2 years. And now, as you see, it's 27 based on the very last forward curve of 15th Feb. We have a fuel bill, which is decreasing between 20192020. In dollar, it is from 6.2to5.8. And in euro, you have that on the left part of the slide. 2019 was EUR 5,500,000,000 for the fuel bill. And for the time being, we have accordingly to the 4 curve fuel bill of EUR 5,200,000,000 in 2020 and you have in the tables of the contribution of the fuel hedging and also the levels of raw hedging for the year 2020. So I don't create any link between the two, but I think we have plenty to keep in mind that there is this estimate, of the impact in terms of loss of revenue and cost save because of the operation being stopped concerning the virus and also the fact that the shore market has strongly changed since the end of the month of Jan. Then I hope it's 20 concerning the unit cost. Concerning the unit cost is 3 main points. 1, during the investor day, we have indicated that the target will be at minus 1 per France every year between 2024. First element, we think that Air France will reach or even, do a bit better than this target. At least it is already the case for 2020. And it is clearly one of the big ways load of the transformation plan initiated by the Air France FinancialANT KLM for the timing, it should be a bit more difficult for 2 reasons. First, there is some one off impact. At the function cost level. And there is, of course, also the impact of the new CLAs, which means that probably carrying will be a bit lower compared to the target we have given to you during the investor day. And last element of course, but difficult to quantify right now is the fact that the coronavirus crisis will impact our capacity compared to what we have planned initially. And depending how much capacity will be lower than the plan 1, we will have an impact in terms of unit costs, which means that for the time being, we are still positive about unit costs control, of course, but we stick to a relatively large range in terms of target. So same as the last year, to be honest, unit cost ex currency between 0 and -1 percent for the year. 2020. So which drives me to the page 29. With the global guidance for the year 2020, with capacity for the time being estimated for the passenger between 2 and 3. Transavia 4% to 6%. Of course, Transavia will not impacted by the crisis if it is longer than what we expect today. But of course, for the passenger, it will be more true. Fuel based on the last four quarters of minus 300. QNC, this is a headwind of 50,000,000 compared to last year. Unit cost as explained between 0 and minus 1% in CapEx at EUR 3,600,000,000, so lower than what we presented during the investor day when we gave you the number of EUR 4,000,000,000 of course, is now a CapEx post operating lease. And again, the net debt on EBITDA expected CFka 1.5. So I have finished my presentation and with Ben and all the teams around the table, We are available Ladies and gentlemen, if you would like to ask a question, session. You. We'll now take our first question from Roxandra Hardo Dooser from Kepler Cheuvreux. Please go ahead. Your line is open. Good morning. Three questions, please. First, thank you for the breakdown between premium and economy years. During the conference call 1 year ago, we are highlighting measures to optimize the network in order to improve premium products in Air France. Do you see an impact from those measures and how do you think that your premium traffic have formed relative to the market 2nd, on the impact of the coronavirus, what volume decline to Asia excluding China have you assumed in your guidance and how high is the isolated impact from the coronavirus on transatlantic within Europe? We know that a big trade fair in Barcelona has been canceled recently. Do you see in some European markets early signs of our potential impacts from the coronavirus endpoint to point demand within Europe. And third, at the Capital Markets Day, you were talking about plans to increase utilization level of their plans, please. Is that the target for this year and how long do you think it will take to keep utilization levels at the accounts comparable scale? Sorry, for utilization, I don't know if Mr. Steve has that as not the data. So he will provide you the data. It is improving because the idea was, as you know, to try to have more spare aircraft available, but not to but to compensate for the fact that you have more sales aircraft by increasing the utilization of the of the aircraft. But, Steven will provide to you, Steven. Yeah. Yeah. Let me, shortly come back on it. So the utilization fleet, we, actually, we used, actually, at this moment, with the spare fleet to optimize our operations we did very well on that since the summer. Now we are looking at how we can optimize our fleet, but of course, with all the current developments, we have other issues, which we are talking about. But we are working on optimizing further our fleet utilization And of course, all the new fleet will help here also in terms of fleet reliability. Thanks. Yes. Concerning the impact of the coronavirus 2 things. So clearly today is the largest is coming from China. Because I remind you that we have totally stop operations to China for both main and secondary cities. So I will say that it's a impact we gave you today between the $150,000,000 $200,000,000. It's still your last part, which is coming, which is coming from Asia. It's true that we have also a bit reduced capacity mainly Hong Kong is impacted in Taiping and Manaea. But if you consider all in all, I would say that 84 samples impact is coming from China and the rest is coming from the rest of, sorry, the rest of Asia There is some impact in the some impact in Europe. Of course, you have indicated, I'm just talking about his big barcelona congress on communication, I think. So it will be also impacting demand for some event of some destination into Europe. I will have a couple of key priorities first to prepare and to manage. So I think that to prepare the first fraction was great. I think that we have followed our many other airlines in Europe, the fact that we stopped flying It was not an easy decision, of course, also vis a vis friends in China. That I think it was very difficult to avoid such a decision. In the same time, we are reconsider also the network and the schedule the summer period, we see if accordingly to the development we will have in China. It is possible to redeploy part of the fleet to some other destination where the demand could be a bit higher than what we to us in the China or in Asia. So for the time being, no decision yet. There is a network department in the 2 carriers. Are working jointly in order to see how to react if the crisis was longer than what we have in mind today. I have one more point on the aircraft utilization progress that's currently going on at LCOS. First step was to stabilize, the on time performance. So aircraft that were planned to exit the fleet that are unencumbered were kept back a little bit longer to provide additional backup. So on a year over year basis, the utilization if you count those aircraft, is hard to compare. And as we work through the rest of the year, we develop, the, the upcoming schedules future schedules for Q3, Q4. We are on track to get the alpha authorization closer to KLM. We're also making some adjustments to the, LCOS network schedules. There are quite a few, LCOS aircraft based on the current timings that do spend many hours on the ground, away from France. You know, we have this in South America. We have this in South Africa, as well as some destinations in Asia. We are relooking at the times of those flights to bring back those aircraft earlier to, to Paris in order to provide opportunities to add additional funds. So that is on track. But if you look at the, year over year utilization in the short term, we are going through a stabilization exercise in part, by keeping, you know, 1 or 2 additional aircraft, for backup purposes as we see, that we see how Delfas can sustainably move forward in increased utilization levels. Thanks. Thank you. We'll now take our next question from Alex Irvin from Bernstein. Please go ahead. Your line is open. Good morning. Two questions from me, if I may please. First of all, on domestic France, you've been sort of looking to pass your reductions in this market and it looks like that's now continuing. Unit revenue looking to be stabilizing, how you're thinking about the attractiveness of that market in the medium term, please? And then secondly, on your narrow body fleet and specifically the older A320s and A321s, do you expect to be able to replace these in the near term or you're going to have to keep flying them in which case, how will we think about maintenance cost evolution, please? Concerning the domestic market, of course, I can give some an amount, if there's a scenario, but you know that the domestic market has to be worst picture. It is still a big loss in the Air France economics. There is good and by the reason for that, We know that there is a high level of competition, the high speed train development is something which is very specific to friends. In the sense that the safe is still are still with some redeveloped new routes to Pordeaux, for example, we know that is rude, sorry to say that, not making money for the trend. So it is competition against which it is extremely difficult to fight. So we have to adjust to readjust. We have done that complaining the route between Paris and Bordeaux, but it is clearly, if I'm saying, which is asking to Air France, the permanent effort of 1st situation. And we have to continue. That's why the plan has been launched last year to reduce capacity by twice 7% in 2019, 2020. The plan is ongoing. Second, there is also a focus on the cost issue. That's why, as you know, we are phasing out the ATR 52, 72, which are now out of the fleet of HOT. We are still working on the field of the Amaya 145, which means that progressively, the fleet could be more Jose Nous with the on Wire 190170 and the Bumba and the, yeah, Bumba GCC series 1700. Not necessarily. So it's a Bombardier Federaljet LNG 1000 LNG S700. So clearly, there is work the fleet. There is work on capacity and there is also work on the cost with the voluntary departure plan, which has been launched last year with first departure in 2020 for more than 400 people. It would be 350 people leaving the company but also more people leaving the domestic business unit to move to some other departments into Air France. So it is addition of all season amount, which we hope will progressively support the improvement of the result of of the domestic of the domestic market. But it's clear that it is not a needy, a a needy market. There is a trend. There is new way of traveling for people with coaches and business a company, which are also developing into the French market. So that's why It is not a easy game to be, to be honest. Concerning the 2020 So your second question, with respect to replacement of the LCOS Airbus 320s and A321s, We have, as, as I believe you all know, we have placed an order for 60, Airbus 8 220 series 300. And those will replace the Air Force Airbus A318s and A319s starting in September of next year. Those are on track. Of course, these are the highest unit cost airplanes we operate in, in Europe. So we are looking forward to, to bringing in those aircraft as quickly as possible. On the A320, A321 side, the majority of those aircraft we're earmarked or are earmarked to stay in the fleet for the, medium term. There is no urgent requirement to replace them. We are, however, studying, options on, on what the replacement aircraft options are And as we've said previously, that would, should Airbus decide to introduce a larger version of the A220, we be very interested in that aircraft. And we do have just a few very old A321s, And in the short term, we will figure out how best to replace that capacity. These are the original aircraft from Argentel, which are still in the Air France fleet. We have 5 of these, out of a total of, you know, 115 countless, a320 family airplanes. So in terms of, you know, short term, capacity decisions, we're really looking at only those 5 airplanes that we need to deal with. Which we're fully comfortable on the options that we have. Thank you. We'll now take our next question from savi Syth from Raymond James. Please go ahead. Your line is open. Hey, good morning. Just a couple of questions from me. The first is just a clarification on the the COVID impact assumptions. Just wondering if you could provide a little bit more, but even high level color over split between passenger and cargo. And then also just between 1Q and 2Q. And then second question, just on your comments on kind of a long haul and kind of the transatlantic left hand, curious what the trend is into 1Q and what your is the kind of the softness that you see it saw in the transatlantic is perhaps better given some of the failures, and maybe where some of the, some of the beer capacities being redeployed in the transatlantic or any other, areas. Thanks. On the first question, I would say, it is not Humor, but almost as cargo is already so low that, I suppose that when we give the number 150 to 1000000, 1st expand as a passenger business, of course. Because there is a deterioration of the cargo was even present before the crisis of the coronavirus. Concerning the Truth Atlantic, you're white. At the end of the year, 20 18 was not, let us say, fantastic in terms of development of the unit revenue. And you can have some risk that if a lot of airlines are redeploying their part of the capacity. It won't be a big, big volume, but anyway, if there is some wooded primer to the NASA Atlantic, it can exert a new pressure concerning the unit revenue on this specific network. Cedric, just to follow-up on the impact, is that mostly in 1Q or is there some of that that that's related to 2Q as well. And then on the North Atlantic, is that where kind of your capacity is being redirected today? The by definition, the $750,000,000 to $100,000,000 is given for the period, March and April May. And because in February, March, we have almost everything to change. Of course, a last part of the impact is concentrated during the first quarter. During the first quarter, in which if you look presales, these are data, the fuel bill will not get the from those issues as the 4th quarter as the first quarter that should be not down compared to last year. So it means that you will have probably a big hit for the first quarter. And in the second quarter, accordingly to assumption concerning the traffic, of course. You will have less than the Q1, but then you will also benefit from the indirect impact of the of the fuel bill, which is lowering compared to last year, which is not the case for the first quarter. And then on the redirection of the capacity? As I told you, for the time being, we In the current period, it's clear that because the decision to stop the traffic to China has been taken because we're obliged to do that. We have not immediately redeployed the capacity and we have used flexibility, suddently given to us to increase the amendment's operation and to take care of the airplane in order to prepare the summer. So we have reduced capacity because we have not redeployed the available capacity for the summer and accordingly to what will happen to Chinese market, then we can consider and we are working on some scenario where it could be possible to redeploy part of the fleet made available if by chance or not by chance, if Elias has a crisis in China, will still be present into a survey what everybody nobody wish. Got it. All very helpful. Thank you. Thank you. We will now take our next question from James Hollins from Exane. Please go ahead. Hi, good morning. A few for me, please. Ben, it's first time we've heard from you since your Investor Day. I was wondering if you could just run us through any pushback you're getting on the transformation plan. I think when we heard about it, it was when staff heard about it as well. Secondly, just following up on Transatlantic, you talked about, adding capacity, I think, in Q4 to difficult share. Just wondering if you could run us through exactly what you mean by that in terms of sales of traffic flow and whether it's exceeded. And third one is on the KLM CLAs. Are we all done on that and maybe a bit of detail as well on the quantum? Thank you. Okay. James, thanks for the questions. So On the Alfons transformation side, we're quite pleased with how things are going on at Alfons mainline. So the main Alfonso brand, as I, as I mentioned earlier, what we saw during the extensive transportation strikes here in France for about 6 weeks for Air France to be in a position to operate 100% of schedule without the, the impact of the air traffic controllers, on that affected us. Very, very happy and proud of our employees stepping up to that. So in terms of cooperation and alignment with all of our major groups here in, in, at Alfron's mainline, very, very happy. And one thing I would like to point out for the first time, the main pilot union at France, the SNPL, has proactively asked to join our financial teams in going on financial road shows to, you know, ensure that analysts and our shareholders, clearly hear from them upfront their belief in our strategy and their alignment with management. So that has taken place two times over the last month. On the rest of the transformation plan, we are on track. We are getting some pushback in the regional market. With the hop, pilots. This is a ongoing discussion. The, the demands that we're getting out of hop are, you know, they're not realistic. They could, what they're asking for is up to, you know, 1 third of the revenue, that we receive from Hop So this obviously is not, is not possible, would not be sustainable. So these talks continue. We have a small, group of ground employees in the of, of France that, having an emotional emotional trouble accepting the reality. Our situation in domestic France is not sustainable. We are being very responsible to all of our employees, affected by a reduced activity in Western France. We, we have no forced layoffs. We do have voluntary departure plans, which we do see a strong uptake. We do have very good options for our staff to move to, other positions throughout the network. But apart from these 2 isolated cases, as I said, hop regional pilots and very small impact on the part of, of some ground agents in Southern France. We do, we do foresee no material impact to our operation in the near term. In terms of CLAs. And all major CLAs have been negotiated and are now final. At KLM, those were concluded at the end. Of last year. I don't think there's, there's anything that has not been extensively covered in the press. There were increases between 5% 6%. You know, in these, we will do everything we can to mitigate those. Going forward, on the Efron side, I think those are well documented and very pleased. These were done a little earlier than KLM. And as you see in the unit cost improvement at Afram, the wage increases are more than being offset, but the new flexibility, that has been provided by those contracts to ensure that, we have, going forward. So we're very happy with the way those two things are balancing out overall. Thank you. We will now take our next question, Michael Kuhn from Societe Research. Please go ahead. Your line is open. Good morning. Basically, one follow-up first on Corona virus. The 150,000,000 to 200,000,000 impact was well explained beyond that and that will be more kind of a worst case scenario analysis. If you have a prolonged crisis, until or into the summer period, what would be the financial impact in such a scenario. Let's see if you couldn't fly to China over the peak summer season, And then secondly, you are guiding, for a flattish net debt to At the same time, the CapEx is going up and I think it's hard to expect a massive increase in the operating result of cash generation. Do you foresee any asset disposals for the current year? And if yes, what would you expect to dispose? Thank you. Concerning the impact, I see that we have to to be very clear. We have built a scenario, which is today aligned with the decision we have taken from an operational point of view, after that, you can build many, many scenarios, 1 month, 3 months, 12, 24, But I think that, it is not the time to do that. So we have provided you today, something which is coherent with the decision. We are taken operationally and we give you the best estimate we have today concerning the financial impact. Of scenario. And we will see later to, to, to be honest, but we cannot build the scenario and scenario without testing first, which is likelihood of the realization. 2nd, we have Of course, we are managing the situation externally carefully. We have not yet decided to launch Global will consider a share of our plans for 2020, both in terms of CapEx, in terms of unit cost, in terms of everything. It's clear that if we are convinced in the weeks to come, that there will be a finally more chance to see the crisis being far longer than what we expect today. The 2 management in both Air France and KLM will have to totally reconsider their plan in terms of everything capacity, CapEx, whatever is domain where they have to take their responsibility. We consider that we are not yet there Big reason is that the crisis is less than 2 weeks. I remember that end of Jan where we are positive and suddenly, and we have today's 15th also 20th Feb. So it is only 3 weeks. We have, in fact, discovered the situation was drastically changing. So no problem to be flexible. Let us keep some, some, still, some days to look at the situation. We follow that on that to the business, of course. And then we will see if we have to totally reconsider our budget plan that for the time being, The situation is what we have tried to describe in the presentation, a possible impact between 1,000,002,001,000,000 And based on that and based on the normal flexibility we have, the guidance I have given to you And of course, okay, in 3 weeks, situation can be totally changed in both directions. But for the time being, this is where we are. And perhaps I might just add to that. We do have, I mean, we do have many scenarios that we can we can look at should this virus continue? And I think, it's important to mention that the network KLM and Prevail files are extremely well diversified. And of course, as we move in to the, to the seasonally busier part of the year where in many markets we are in excess of demand, the opportunities for redeployment are, are numerous. You know, we have a strong network in Africa, a very strong network in North America, and there are some big, big volume markets to the Dutch and the French leisure markets. And so there are, opportunities for redeployment within our group that are perhaps not available to some of our competitors. Excellent. Thank you. And maybe one more question on the form a ideal drill routes, ways of stepping in now. Can it be assumed that given that those are existing routes, the the ramp up to profitability is probably quicker than on normal route openings. So on the on the increased activity to Algeria from Paris, predominantly from Paris Salt Lee Airport. This is a very, attractive market for us. We do have some presence. We do expect the ramp up to profitable activity operations in that market to be faster than normal. So this is This is something we, you know, we, we label, we, lobby very hard for. We're very happy with the, with the allocation of traffic rates. And, and capacity that we'll be adding to that market. And this, this should be, you know, this should have a very positive impact on our medium haul results. Excellent. Thank you very much. Thank you. Our next question comes from Johannes Brown from MainFirst. Please go ahead. Your line is open. Good morning. Thanks for taking my questions. I have 2. Firstly, again, on the coronavirus, just a clarification, whether the 150,000,000 to 200,000,000 that you guided, whether this includes the offset from lower fuel prices, and if so, what is the actual top line impact from Corona if you just take the unit revenue impact? And then secondly, anything you can share regarding your discussion with on the next regulatory period. Okay. On the first point, just to be clear, the 150,200 is not taking into account any impact of the fuel price. It is really I have tried to be clear on this impact of the loss of revenue to Shaina, but also to to Asia. And the costs which are sales because when you, for example, stop flying or reduce your capacity, of course, we have less less cost, but I have not taken into account the 150, 200 estimates of the impact I'm not taking anything coming from the fuel bill impact concerning. I hope all the vary. I will give the floor to Steven Yes, thank you. On the procedure, is it highly restricted procedure by the French state? We have given our vision on the cost of capital, which is, of course, in our view, going down giving effect that all interest rates are very low. And we are waiting actually 1st for the outcome on the cost of capital. And then on the second thing is we discussed on the investments on the capital expenditures where we are together looking at our plan to develop ADP more in the direction to support our products. Great. Thank you. Just one follow-up on the first one. If you take your assumption that you had at the beginning of the year with fuel, actually rather going up and down, and no coronavirus impact. And you're now modeling or you're now guiding for up to 200,000,000 coronavirus impact, but then some 1,000,000 offset or 1,000,000 relief from fuel. Net net, we are not looking at the downside on profitability, if I'm not mistaken. To the I can it is your calculation, but I I cannot say that I am totally disagreeing with it's clear that if you look at the fuel bill, when we build the budget, the fuel was up, and I always should look at the 4 last years, the fuel bill is down. Okay. So goal, the time metrics is not exactly the same. Keep in mind that the fuel bill we give you is the next 12 months or 11 months. So this is there is a should be between now and the end of December 2020. When the coronavirus impact we gave you in the presentation is something which is covering the period, Feb, March, April. So there is not exactly the same time metrics, between the 2 11th and At that stage, to be honest, I cannot say more that your calculation is correct, but keep in mind that it is not exactly the same time metrics. I told you before, in Q1, the fuel bill is increasing in Q1. So the minus 300 is over the 12 month. And I just had one more comment here. Johannes, regarding, I hope all the So I can say that, the 2 teams, both at Elkhart and I hope all the value are working very close closely together to, to look and to develop joint plans to, to build the new terminal 4 that is expected, to be within the next 15 years. So that is moving along positively. And of course, that does have an impact on cost of capital. And the, potentially our future costs of doing business here at Wazee Shaldegold. But I must say that the the cooperation and joint understandings between two teams are, have become much more positive and are becoming more aligned. Okay, great. Thank you. Thank you. We will now take our next question from Carolina Doris from Morgan Stanley. Please go ahead. Hi, good morning. Thanks for taking my questions. I have 3 actually. 1, do you expect any implementation costs from the transformation plan in 2020 to go through your P and L and if so, what's the size? The second question is this, if your partnership with China, Eastern, it's impacting the $150,000,000 to $200,000,000 because it's a revenue sharing. Does it help or does it or is it a burden to your to the coronavirus impact? And I guess the third question is probably more for Ben few airlines, I think, delta decided to fully offset, it's a couple of emissions starting this year. Some other airlines had increased the blend of biofuels. How do you how do you think about sustainability for the Air France KLM group? Yes. Concerning the implementation of the transformation, it is very limited for the moment. So we don't expect We have very high implementation costs regarding transformation. We are doing it together with all the management teams, and it is focused also a lot on earnal spend. So for the moment, we have done a very big cost for the implementation first seen for 2020. Concerning the second question on the impact of the JV between Channel Eastern and Air France KLM. Of course, we are taking that into into the calculation, but I will say it is very, very minimal compared to the other impact of the two partners are suffering the same or more or less the same. It is partly compensated to the settlement team, but I will say that clearly the effect is minimal compared to the global impact of the loss of revenues. Okay. Regarding CO2 initiatives, my sustainability initiatives, as I mentioned, in the initial remarks, of course, Alfon's KLM, we're taking our responsibilities as best we can. This is not new. We do have the number one position on the Dow Jones Sustainability Index Worldwide That's because of our ongoing efforts. It's just not started now. It's been going on for, many years and a lot of the, and the that have been taken and continue to be taken are not well known. So we will be, communicating, some of the efforts that have already been started and plans to evolve them. As I mentioned, on the domestic France side, we are now, compensating all emissions, regardless of the number of customers on board. And we are entering into extensive, relationships regarding biofuels in the Netherlands, and we are working hard to find providers here in France. To do the same Thank you. We'll now take our next question from Malte Schulz from Commerzbank. Please go ahead. Your line is open. Hi, thank you for taking my question. I must have been already discussed, but maybe few points I would like to discuss as well. First of all, maybe now with Delta's stake also in LatAm and LatAm exiting One World. If there also are you currently working on with them onto a deeper relationship and maybe also developing a joint venture towards, LatAm, with LatAm. And, yeah, maybe we'll take this one first. We are we are not, working on the the Translante joint venture with LATAM. We do have a very successful partnership, with GOL in Brazil. We have recently agreed to expand relates going extremely well. And, this is, these are our plans to ensure that our capacity is optimized to and from South America. And, you know, working with gold is, right now, the best solution for Air France Caitlin. Okay. And maybe a second question on Italy, with the bankruptcy now of Italy and maybe the market is a little bit more consolidating, how are your stands on italia and potentially investment there? Well, italia, we have, at this time, no, no plans to invest in Alitalia. Thank you. We'll now take our final question from Gerald Castle from UBS. Please go ahead. Thank you very much. Kind of 3 from me. You know, good cost control in, q 4. You know, if if there wasn't kind of the impact from China, would would you be doing actually better than you know, the minus one at the top end on the extra unit cost, do you think, in q 1? Two, just in terms of China, kind of, I know you don't want to say anything about kind of potential scenarios, but when did the Chinese group bookings normally start to come through for the for the summer? Is it kind of Q2 time? And, you know, how how would you think about the profile of Chinese bookings going into the summer. And then just kind of sticking with kind of environmental, the French increase in, airport passenger duty, I think I think was up 1.50. How that's kind of changed? Or if at all, you're thinking about the short haul market there. And looking forward, I guess, as taxes ramp up relating to Coursera, if kind of how you plan to deal with these? Thanks. So concerning the cost, yes, you're right. I think that the performance of the unit cost to control is more than okay for Q4. And also more than okay for the full year 2019. So I think it is extremely encouraging. And also because You can easily say that that the contribution of Air France, we have the cost basis a bit higher than KLM is also a bigger contribution to the cost reduction, which I think is a good news. It's always important to see that there is a slow but partial alignment the unique cost base is between the 2 carriers. And from that point of view, the transformation plan in Air France is, of course, something which is extremely important. So difficult to say that what will be the performance in Q12020 Of course, and we are very clear on that. The corner story is not really helping. Because even if China is only a 5% of our capacity, when you are over the full year, when you go to Zoho for your capacity to share enough already some weeks, it will impact necessarily. And mathematically, I will say, the unit cost of the group as a whole. So clearly, that's why you have a bit cautious concerning the range of for the unit cost target for 2020. We are more optimistic before the crisis, but that's why we have a bit enlarged the range from the auto minus 1. Also to take into consideration, the uncertainty coming from the from the Chinese Q2. And then in terms of the booking curve, inbound from China, you know, it is, you know, each relatively, balanced or smooth, the curve, starting out at a 1 year out and the moving slightly more advanced than some of the other inbound markets. But if you look at what the situation was last year, at the end of 2018 and the beginning of 2019 in France with the This did have a negative impact on inbound, tourism and inbound traffic, that, that we experienced into, into France. So obviously not the same thing. But so we do have a reasonably good understanding of when there is some type of unforeseen event, how those traffic numbers can, can be impacted and what are our options to, to ensure that our projected traffic does remain at levels that we've projected In terms of the tax impact domestically, I think our position is well known. You know, regardless of any change or increases in tax, we are, in the middle of a very aggressive transformation program within domestic France. You know, our number 1, you know, our number 1 position or number one requirement in domestic France today based on 2 fronts. 1 is there are 3 or 4 big volume markets out of, Paris, 2 Southern part of France. So now say Nissan Toulouse, We do run a NABET product there, you know, hourly or more than hourly. Those we're investing heavily. These, these do perform relatively well. We do have numerous cities, that connect our main hub, the Alfons main hub at, Pally shelled a goal that, those routes will continue to play an important part. And the bulk of that traffic is flying long haul. So there is, you know, any cost that's imposing us on those routes will be spread over, over a much longer distance. And it's our view that we'll single out, on those, on those markets as customers will have alternatives through, through other hubs that may not be impacted. So we expect, you know, no competitive impact on those types of light in terms of the other activity that we have within France. So the non, high volume, palliole, to, those 3 big navette roots and the feed traffic into, wazee shelter gold. These smaller roads, already heavily, heavily under pressure. It's what I mentioned because of the Peugeot, and some of the, you know, the high unit cost airplanes that we have, the tax does not make that. Any increases in tax do not, do not help us there. We'll just watch to accelerate the plans, but these will not be new plans that would just put us in the division to have to accelerate them even further. Thanks very much. There are no further questions. I will hand the call back to the speakers for any additional or closing remarks. Thank you. Much, to, to all those on the call for the extensive questions. And, thank you again for your interest in Alfals KLM. And we look forward to continuing the dialogue as we go forward. Thank you. Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.