Ladies and gentlemen, good day and welcome to the Q3 2019 Air France-KLM conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Frédéric Gagey, Chief Financial Officer of Air France-KLM. Please go ahead, sir.
Good morning to everybody. Welcome to this analyst call for the result of Air France's Q3 2019. I am in Paris with the CFOs of Air France and KLM and the team of the investor relation. I go to the presentation directly. I propose to go to the first slide, which is a short resume of the result for this Q3, what is happening during these last three months.
First, we continue to increase our activities. Traffic is up 2%. As we warned you already in August, we have a negative passenger unit revenue. If you add together the networks, Air France- KLM plus Transavia, we have this passenger unit revenue at -0.6%. It is in line with the message we have translated to the market in the middle of the summer.
This is the main source explaining why the operating result is less than the last year. In Q3 2018, the operating result was EUR 1.65 billion . For the Q3 2019, we are EUR 900 million for the operating result, which is -EUR 165 million. It's a drop. Explaining mainly, we will see that later, by the negative passenger unit revenue and also by a hit coming from the fuel bill.
The net debt is down -EUR 253 million compared to December 2019, below EUR 6 billion, at EUR 5.9 billion end of September 2019, with a reduction which has been a bit impacted by the quite strong dollar we had at the end of the month of December. We will see also that the level of the dollar end of September has impacted the net result of the company. Basically, this is a short view about this result.
Good traffic, passenger unit revenue negative, operating result less than last year. We continue to have this decrease on the new debt. I go to the next slide, where you see a bit more precise number. First, the revenue up 2%, up 1% at constant currency. Fuel expenses, EUR 1.5 billion, which is a bit more compared to last year, around EUR 130 million-EUR 140 million.
We will see that the net impact excluding currency is a bit less. The EBITDA at EUR 1.6 billion, -7% compared to last year. Operating result, I discussed it. Operating margin, of course, direct impact of the operating result, which stand at 12% compared to 14% last year. The net income is also less than 2018 Q3. We have a drop of -EUR 400 million, which is more than the drop in the operating result. Two main explanation behind that.
First, the fact that we have opened the take into account the earlier phase out of the 380. The impact on this Q3 is EUR 100 million below the operating result. We have also a non-cash impact coming from the strong dollar, which is impacting the financial cost due to the revaluation of the debt and the revaluation of some maintenance provisions. We expect that part of this effect will be reverted in the Q4 progressively.
The dollar is a bit weaker right now compared to what it was at the end of the Q3. Adjusted operating free cash, I will show you that later, indicating what we have over the nine months period, year- to- date. Net debt, a reduction of EUR 250 million, I already indicated that, and the net debt, maybe I will show, is at EUR 1.5.
Next slide is Airbus A380 phase out financial impact. As we have already announced in the Q2, we have taken the decision to phase out progressively the Airbus A380, following, by the way, the decision of other carriers. The global non-current result is estimated at EUR 400 million, this impact will be spread over the period between now and 2022.
For the Q3 2018, the impact is EUR 100 million negative, which is the sum of the impairment of asset for EUR 75 million and EUR 25 million of accelerated aircraft depreciation. For Q4, we expect an impact of EUR 50 million, again below the operating result. I go to the next slide just to describe what is happening in the various businesses of the group.
Network, I told you that the unit revenue was -0.6%, it was by adding network and Transavia. If we focus only on the network Air France-KLM, the unit revenue is -0.9%, clearly indicating that the global aero environment is less brilliant or positive compared to what we had in 2018 and 2017. Over the years, the situation has been changing from one quarter to another one. Q2 was not so bad, Q3 negative, Q1 was a bit weak.
We see that there is some uncertainty concerning the evolution of the passenger demand and the capacity for airlines to maintain the level of the unit revenue. I think that the result of British Airways this morning is giving also the same type of indication. A signal which is really negative on my point of view concerning the global environment is the cargo unit revenue, -13%. It is numbers we have not seen already for two or three years.
We have seen that in the middle of the crisis before 2016 concerning the cargo activity. It was far better during the last two years, in the beginning of the year, 2019, we see again a negative unit revenue development concerning the cargo. For the Q3, the number, I will say, is relatively impressive, -13%. Concerning Transavia, both Transavia France and Transavia Holland, the summer has been fully okay. We have capacity increasing by 8%.
The unit revenue is positive, +3% in spite of the capacity. The margin, or the operating result, is almost stable, -EUR 5 million. Note, however, that the summer has been impacted in Transavia France by some operational difficulties due mainly to the delays in the training of captain for operating the fleet of Transavia France, and it had impacted both the capacity of the credibility of Transavia to grow according to the budget, but it has also increased a bit the unit cost of Transavia during that period.
The maintenance development is okay. You see the operating result, EUR -2 million compared to last year, mainly explained to be precise by some one-off, especially the one-off coming from the bankruptcies of Aigle Azur and XL Airways, where we have some doubtful debt, which, alas, will be never paid. The impact is estimated around EUR 10 million, which means that if you exclude this one-off, the maintenance margin would have increased during this Q3.
When we go a bit deeper in the analysis after discussion with the controllers of the maintenance, it's clear that the margins on equipment, the margins on airframe are increasing compared to last year, same period. The margin vis-à-vis third clients support is not internal, but with the external clients, is also stable. A good development of the business in the maintenance.
The result is the group evolution of the operating result I have already described. I go to the next slide. To see what is happening in terms of unit revenue, when you look at the various network or subnetwork of the group, there is, I would say, first good news, which is evolution of the RASK in the French domestic network, +4%, which is clearly a good result, largely explained by the fact that the capacity are going down severely, -12.4%.
It is totally aligned with the strategy we announced in the Q2. We expect the capacity on the domestic market to be reduced by 6% in 2019 and again 6% in 2020, which is of course, part of the restructuring plan for this heavy loss-making network of Air France. This reduction in capacity goes together with the restoration of the fleet. By the beginning of 2020, the fleet of ATR, which are the propellers used by Hop!, will be totally phased out.
Second good news, relatively good development of the RASK concerning the medium-haul hubs from both flights going to Charles de Gaulle or to Schiphol. We have developed capacity during the Q3 by +3%, and the RASK is stable at 0%. Of course, what is explained mainly the reduction of the RASK during this Q3 is the long-haul.
Total long-haul RASK is -1.5%, explained by Latin America, not a surprise with the crisis in Argentina and Brazil, where the RASK is -7%, followed by Asia, -3%, and North America, when we have, excluding the currency, a unit revenue of -1.8%. Two small subnetwork are going not too bad. It's mainly Caribbean, Indian Ocean, where the RASK is +5% in Africa and Middle East.
I go to the next slide, which is just insisting on the phase outs of the ATR fleet I just indicated, and also the good medium-haul hubs and French domestic performance in terms of unit revenue. Next slide on the unit cost. Unit cost is up 0.4% during this quarter, but if you go to year- to- date, we are at -0.7%. Which means that we are fully en route to satisfy the guidelines of unit cost between 0% and -1% for the full year 2019.
As I told already, during the Q2, we expect to be on the very good side of the range, which means that we will be closer to -1% than to 0%. Next slide. We insist a bit on KPI, because you know that it is a focus for Ben Smith and Anne Rigail to improve and to come back to normal situation in terms of on-time performance and net promoter score for Air France.
In fact, it's going not too bad. You have on the slide, the evolution of Air France on-time performance among the European peers. You see that in July, August, September, the rank has been seventh, fifth, and third, which is clearly far better if you compare that to the situation, for example, in the Q3 2018.
You see also on the right of the slide, a noticeable movement concerning the net promoter score for Air France. For Q1 to Q3, this KPI is now at 24, 25, which is almost twice better than the result in 2018. I think it is really encouraging result, showing all the work which is developed right now by Anne Rigail in order to improve the situation for these specific KPIs.
Next slide is a waterfall for the operating result from Q3 2018 to Q3 2019. Main explanation in terms of decrease is unit revenue, -EUR 114 million. The other biggest impact is the fuel price, ex currency, -EUR 74. Finally, we have the same impact for unit cost, negative -EUR 25, and currency impact, positive, +EUR 24.
It's really the unit revenue and the fuel price, which are explaining the deterioration of the operating result from Q3 last year and Q3 this year. I go to the next slide. To comment on the performance of the two companies. At the top, you have the evolution for Q3, where I will say the evolution is relatively similar, for both Air France and KLM, which is a deterioration of the margin of -2.2 for KLM, -2.5 for Air France.
Keep, however, in mind that there is some one-offs in Air France, which are relatively significant for this quarter. The first one I have already discussed, it is the impact of the bankruptcy of Aigle Azur and XL Airways on the French market. These two company left an unpaid bill of around EUR 10 million.
Second, we had a compensation for the strike last year to be paid to Delta, which is also in the order of magnitude of -EUR 10 million negative for Air France. Finally, the end of operations in Joon has forced Air France to take some one-off cost for EUR 8 million. In total, you have EUR 30 million of one-off in Air France for this quarter.
If you correct for that, we can admit that the evolution of the operating margin for Air France and KLM are relatively the same for this Q3. At the bottom of the slide, we have the evolution year-to-date. Here, clearly, the situation is a bit different. For KLM, the reduction of the operating result is -EUR 246 million, so reduction of margin of -3 points. For Air France, it is less.
You have, of course, to take into account the fact that last year we had the strike in Air France with a global impact in the range of EUR 200 million. If you correct for that, you have a far more parallel evolution of the situation among the two carriers of the group. I go to the next slide, which is giving the evolution of the free cash and the net debt since December 2018.
The adjusted operating free cash flow is positive over the period, +EUR 100 million, is the last dark blue bar on the left. On the right, you have the evolution of the net debt between December 2018 to September 2019. We have taken into account the adjusted operating free cash, the payment of lease debt, of course, the new lease debt, which is all due to the entry of leased aircraft or extension of already existing leased aircraft into the fleet.
You note also the impact of the currency, which is mainly the impact of the strong dollar at the end of September. As I told before, I expect that some of this impact will vanish during the Q4. the dollar being a bit weaker compared to what it was at the end of September. Altogether, the net debt on the EBITDA ratio is at 1.5x, stable. If you look at December 2018, and September 2019. We go on the next slide concerning the revenue outlook.
First indicator we use with you quite often is the long-haul forward booking load factor. It is relatively stable if you look at the period December to March 2020. It is plus one, plus one, plus one, plus one. There is nothing good or nothing bad, I would say. It is not indicating that we have a great capability to maneuver concerning the evolution of the unit revenue.
That is why, after discussion with the revenue management team, we consider that for the next quarter, or the current quarter, Q4, we expect unit revenue at constant currency, which should be slightly down compared to last year. It is a bit, the situation comparable to the Q3, probably a bit less or a bit better. We compared to that well in Q3. We are still expecting a slightly down unit revenue for the Q4. I go to the next slide just to actualize the fuel bill increase.
In Q2, we have indicated, or end of Q2, we were expecting a fuel bill increasing by EUR 550 million compared to 2018. With the new market, we are now closer to EUR 600 million, due to the fact that we have a bit increase of the fuel price. You see on the slide that the hedging result for the year 2019 is expected to be close to zero, plus EUR 50 million, and at the current forward curve we have for 2020, hedge result, which is expected to be -EUR 150 million.
As always, concerning the fuel, things can change a lot. Next slide on the full year guidance. Not many changes. For the passenger capacity, we stick to +2% to +3%. We reduce by 1% the expectation concerning the Transavia capacity. In Q2, we indicate +7% to +9%. We consider now that we'll be closer to +6% to +8%, which is, of course, largely explained to the delay in the cockpit crew training in Transavia France. Fuel, +EUR 600. I have already indicated that.
The currency, over the full year, it would have been a neutral effect, and we still consider that it will be the case. Unit cost, again, we say in the guidance, but probably in the wide side of it, so closer to -1% than to 0%, happily. The CapEx, an increase of EUR 100 million, which is a minor CapEx increase, which is mainly explained by the fact that we have decided to acquire instead of leasing some engines, considering that the implicit margin in the lease was far too expensive. We consider that to move from lease to acquisition is good for the P&L.
The net debt on EBITDA at 1.5x, as we said, since the beginning of the year. This is the end of the presentation. All in all, message are: aero environment a bit more difficult than what we had in 2018, explaining largely the deterioration of the operating result compared to the Q3 last year. Fuel bill is not helping. Temporarily in Q3, the unit costs are up, but we stick to our guidance concerning the unit cost over the full year. I have finished the presentation, and we are now all listening to your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Please make sure the mute function on your telephone is switched off to allow your signal to reach our conference. Again, please press star one to ask a question today. We will now take our first question from Ruxandra Haradau-Döser from Kepler Cheuvreux. Please go ahead. Your line is open. Ms. Ruxandra, please make sure your line is not on mute. Your line is now open.
Yes. Good morning. You highlighted a strong improvement of the Net Promoter Score at Air France. Could you please give more details on what exactly has been driving this strong improvement? Second, could you please give an update on Virgin Atlantic? Third, considering the non-fuel unit cost decline in the first nine months and the weak comparable basis at Air France in Q4, is it fair to assume that the non-fuel cost guidance for the full year is quite conservative? Thank you.
Thank you for the three questions. NPS, I think that probably the main explanation behind NPS improvement is coming from the other part of the slide. When you see the strong improvement in terms of on-time performance, it is clear that when you look a bit deeply in the NPS answers coming from the client, there is a rule which is that a good flight without non-conformity has a very strong NPS.
The same flight with a small non-conformity has a very bad NPS, which means that the client is extremely sensitive to a small delay or a small change in the schedules. These type of things are improving quite strongly the NPS, which means that when you focus on the quality of operations, less delay, better on-time performance, a good percentage in terms of flight according to the plan, we have immediately an improvement in the NPS.
This is the first explanation. The second explanation is that if you compare that to the last year, for example, it is clear that in 2018, as you remember, the situation in the Air France was a bit, let us say, hectic. With the departure of Jean-Marc and the crisis at the beginning of the year. When you are right now comparing it to the policy of Ben and Anne in a period which is more calm, quite more positive, you see also the behavior of the teams, and that is the client improving, and I think it is the other explanation.
Concerning Virgin Atlantic, we have decided with the partner that, due to various delays, a large part of them being coming from administrative work and discussion with authorities, and also to simplify the treatment in terms of accounting, we have all decided that the official launch of the JV will be 1st of January 2020.
Which means that there is a small delay compared to what we have announced earlier. We have indicated to you that the JV should be in operation 1st of September, after some delays, we have moved to the 1st of January 2020. There is still absolutely good relationship and work among the various working team. In the meantime, I remember you that the JV between Air France-KLM and Delta is, of course, still in operation.
We have not stopped the concept of the JV between Air France-KLM and Delta, which will move to Air France-KLM, Delta and Virgin beginning of the next year. I miss the third question. Steven Zaat? Sorry, unit cost. The question is minus one not too shy? Okay, we are on the good part of the range. I will limit my comment here, but we can be at the extreme good end of the range, I will say, if it is a bit more precise.
Thank you. We will now take our next question from Savanthi Syth from Raymond James. Please go ahead. Your line is open.
Hey, good morning. Just a couple questions from me. First on Transavia. I know it looks like a bit slower growth here in the Q4 as you grew up. Just any thoughts on how we should think about the growth next year, and if you're able to take any advantage of slots opening up at Orly for some of the carriers that went away.
Second, in Latin America, looks like things are down but improving, and I was wondering if that's a result of easier comps or if you're actually starting to see improvement in Latin America. Just somewhat tied to that region, Delta announced a partnership with LATAM, and I know you have an investment in Gol. Just wondering how you see the opportunity in partnering with the various airlines in Latin America, especially given the development with your partner, Delta.
Concerning the first question, it's true, we are very clear on that Transavia France has been impacted this year and limited in growth due to these operational problems coming mainly from the training of technical crews. The next year, when you look to the budget of Transavia France, they expect a growth of 10%.
First, clearly, the growth will come back in 2020. Second, part of its growth can be also impacted, in fact, with the distribution of the slots coming from the bankruptcy of Aigle Azur and XL Airways. XL Airways had no slot at Orly, so it has no direct impact on the slot distribution at Orly. Aigle Azur had a significant share of slot at Orly with around 13 daily flights.
Due to the fact that the company bankrupt, we expect, as usual, that the slot will be redistributed by the slot coordinator accordingly to the European rules, which is, if I do that quickly, 50% for the existing operators, 50% for the new entrants. Which means that in all the cases, Transavia and Air France, by the way, will receive their normal shares of the slot left or made free by the bankruptcy of Aigle Azur.
Behind the slot, there is something which is also extremely important for Transavia, which are the traffic rights to Algeria. Aigle Azur was, in fact, quite present on the French-Algerian market. This is a market which is still regulated with traffic rights negotiated between France and Algeria.
Of course, as a relative small number of carriers, Transavia France will be extremely interested to receive a significant part of the traffic rights, mainly between Orly and Algeria. The destination and possibly the development in terms of capacity out of Orly, out of Transavia, sorry, will be linked to this question. Concerning LATAM. What happened recently is, in fact, something quite new. I think this probably is the biggest member of an alliance suddenly deciding to move from one alliance to another one.
As you know, LATAM was in OneWorld, quite close to British Airways and partly owned by Qatar. We had suddenly this move. When you see Delta entering and developing vis-à-vis LATAM, the strategy, a bit comparable to what they have done, for example, with Aeroméxico, which is developing a strong partnership, partly based on equity stake.
First remark, it is an ongoing process in the sense that there is a lot of authorization, check, validation of the financial operation, before to have this operation fully, I would say, operational, which means that in the meantime, of course, concerning Air France-KLM, we continue to work with GOL, and we will see in the next years if we need to change something to the strategy .
Certainly for the time being, we have some agreements with GOL, and Air France-KLM will continue to work accordingly to these existing agreements. I cannot deny that the step made by Delta in South America is something which is a bit new compared to the former situation. There is one question you have to ask yourself is, in the move to LATAM, what is really the intention of Delta?
Is it to be focused on the North-South routes, I mean South America to the U.S., or is it also West to East or East to West? My first personal feeling is that the step made by Delta is for them first something which is focused on the North-South routes, which means that the links between South America and the U.S.
That makes sense. If I might follow up on the Transavia. If you do get some of these slots and access to Algeria, are you able to grow Transavia France faster than the 10%?
Not significantly. I think it's possible that if we have a lot of the traffic rights to Algeria, we can increase a bit the growth. It will be not significant. The most significant will be the reorganization of the network. Of course, if there is good part of the traffic right to Algeria given to Transavia can be forced to reorganize a bit the network in order to respect this new commitment vis-à-vis the French-Algerian market. I think that it will not impact significantly the growth we have today in the budget.
All right. Thank you.
Thank you. We will now take our next question from Jarrod Castle from UBS London. Please go ahead. Your line is open.
Thank you. Good morning. One on 2019 and two on 2020. Just on 2019, the network, obviously, EUR 160 million deduction in operating profit. Can you give any kind of scale what percent relates maybe to pressure in cargo versus passenger? Secondly, just looking into 2020, can you give any ideas in terms of what impairment we can expect on the A380 in 2020? Lastly, just the fuel bill. It's obviously up since the half year, although jet kerosene in the presentation seems kind of flat to down. How should we think about it being up in terms of capacity indications in 2020 versus 2019? Thanks.
Concerning the impairment for the A380, we expect for the year 2020, around -EUR 100 million again. Not again, -EUR 100 million for the full year. Which is mainly coming from the acceleration in the depreciation of the aircraft. It will be almost the same, probably a bit less in 2021. In total, if you take 2019 to 2022, it will be at EUR 400 million. Concerning your first question on the cargo, that's not so clear for me.
I was just wondering, within the network reduction in profits of EUR 160 million, can you give an idea how much of that impact was due to weakness in cargo versus weakness in the network airline?
As you know, we not normally give an indication anymore on the cargo result, because we have decided to integrate this activity to the passenger activity. If I take year- to- date, I would say that one-third, basically, of what we call the passenger activity, is due to the reduction of the cargo contribution. One-third. Two-third is coming from the pure passenger unit revenue and specific cost due to the pure passenger activity. Third question?
The third question was just around the 2020 fuel bill. It's gone up from EUR 5.5 at the half year to EUR 5.6, and it does look like jet kerosene is broadly stable. Is there anything you can say in terms of cost indications? Is that what's driving us, or is it currency, the slight increase?
Question of the capacity, I see that we will be something between 2% and 3%.
Okay. Thanks very much.
Thank you. We'll now take our next question from Damian Brewer from Royal Bank of Canada. Please go ahead. Your line is open.
Good morning, everybody. two questions from me. First of all, just following up on the theme of cargo, and maybe something for next week. Given the expectations the cargo market's going to still remain weak and capital allocation within the business, will you look at taking any more capacity, particularly of the dedicated freighters out of the cargo business, or at least defer maintenance events there and maybe recycle back into Transavia?
Secondly, on the comments in the presentation where it talks about the pilot ramp up for 2020, what exactly are you implying by that? Is that mainly for Transavia's growth, or is there something else implied behind that comment?
Concerning the freighter, first, it is a situation today. If you take in the last two years, the contribution of the cargo to the passenger business unit was positive. You have not to take a decision just because there is, in 2019, result which isn't as good as the last two years, which means that for the time being, we have no anticipator to reduce the capital we use for the full freighter activity.
You know that we have totally changed the model over the last 10 years. I remind to you that in 2013, there were 10 full freighter aircraft into Air France and around six into KLM, two in KLM and four in Martinair. Now we have a full cargo or full freighter fleet, which is extremely limited, with two aircraft in Air France and 3.5 aircraft, I would say, in KLM.
Clearly, in terms of capital allocation, we have totally restructured our view concerning the allocation of capital to the freighter activity, and right now, more than 80% of the activity is transported in the bellies of the passenger aircraft. For the next year, this share of the bellies will still increase.
In terms of capital allocation, there is a big decision taken by KLM, which is to phase out the 747 cargo, which is also a reallocation of the capital to the pure passenger combi. Sorry, the combis, which are the specific 747, half passenger, half cargo. By doing that, it is another step into the reallocation of capital to the pure passenger activity by reducing the capital used for the cargo. This is clearly going into the right direction and into the direction of your question, I think. The second question? Can you just repeat please?
Yes. In the presentation, you talked about the pilot ramp up for 2020. I'm just wondering what you imply by that. If growth is going to be 2%-3%, what's driving that pilot ramp up? Is it Transavia, or is there something else changing there?
When we speak about that, it is both for Transavia, Air France and KLM, in the sense that when you grow, also due to the fact that we have an age pyramid, which is implying that there is relatively, I would say, high rate of natural departure in the pilot populations in both Air France and KLM.
It means that when you are entering new pilots, of course, you have to respect what it's called in the airlines and what you know perfectly well is a seniority list, which means that there is a young pilot entering. There is an old pilot leaving the company, and you have all cascade of trainings that we have to be organized in order to respect the seniority list. That's why it is so important to have a simpler fleet.
That's why all the steps taken by both Air France and KLM in order to reduce the number of aircraft types in their fleet is so important for the future in terms of unit cost. By KLM moving to a fleet mainly focused on 777 and 787, it means that in the future, there will be a far less impact of the ramp-up of pilot hiring into KLM, because for the long haul, there will be a unique cockpit when the 340 will be phased out.
In Air France also, there is simplification of the fleet, which is going on, with, for example, the end of the ATR, the expected end of the 340, and the end of the 380, with a fleet in Air France, which will be focused on the 777, the 787, and the 350. Altogether, but it's true for any alliance, you can, of course, reduce the operational cost if you have a fleet as simple as possible and a limited number of cockpits.
Thank you. That is very clear. Thanks very much.
Thank you. Our next question comes from Daniel Roeska from Bernstein Research. Please go ahead. The line is open. Mr. Daniel, please make sure your line is not on mute.
Excuse me. Good morning, everybody. Please, if I may, on the competitive development, maybe for winter and into early next year, you talked about your network plans a little bit on the French domestic market, but could you talk a little about if you see any airlines aside from Air France and Transavia also moving into the French market trying to pick up some share out of the Aigle Azur share?
Do you see anybody else pivoting towards Orly? What are easyJet and Ryanair doing? What's your expectation over the next couple of months for their positioning? Secondly, maybe still staying on the LATAM question, could you update us on the progress for the joint venture with Air Europa and how you think about that going forward, given the latest developments with LATAM and Delta?
I guess we'll talk about the strategic plan next week. You commented that the main developments in Q3 were essentially based to market on RASK and fuel. Is there any short-term self-help cost reduction you can still do in Q4, Q1, Q2? Are there any plans to be a little bit more aggressive on unit cost? What would you be thinking about in the near term? Thanks.
On the French question, it's depending which part of the French domestic you consider. It's true that if you look at French province to Europe and sun destinations, there is a lot of competition. You can have Ryanair, easyJet, Volotea, and some others trying to participate to the strong expansion of the traffic between the French province and Europe or North Africa, to make it short.
Concerning the competition for the domestic routes, I mean, France to France, let us say that out of Orly, due to the saturation of the airport, it's relatively limited. There is a bit more competition for the transversal routes, for example, Bordeaux to Lyon or Lille to Marseille. When you hear about new low cost entering the French market, it's mainly focused on the development of the traffic between province and Europe or North Africa, which is not what really we call the France domestic.
When we speak about the France domestic, to be frank, it is mainly Air France against the train, or Air France against the various modes of transportation. The restructuration I described concerning the capacity on what we call France domestic is closure of small routes losing a lot of money or reduction of capacity between Orly and Bordeaux, for example.
Of course, you're right, the slots made freed by Aigle Azur interested a lot of people, but I suppose that for a large of the competition out of Orly, it would be to operate routes from Orly to Europe and not Orly to Marseille, for example. Just an example, between Orly and Marseille, there is only Air France today, which means that it is such a difficult route that it is important for Air France because this is a natural market for us, but there is no competition on Marseille and Orly.
It's not the case when you look at, for example, Nice. Concerning LATAM and the JV with Air Europa, we continue to work, of course, with Air Europa. As you know, for this type of thing, there is many countries in South America, which means that you have to go first to Brazil and after that to a large number of South American countries in order to get the needed antitrust immunity. That explain why this file is progressing, certainly, but a bit slowly. On the Q3, Q4, I give the room to Steven, the CFO of Air France.
Yeah. If you look at the unit cost development in Q4 last year, we had the one-off related to the labor agreement we had. Of course, the last quarter will be for Air France much better than it was last year. For Q1 and Q2, we are very hard working on the transformation plans. Actually we will discuss that next week in our strategic plan, we expect, especially from our transformation a lot, in a context where we have a limited growth and we see also signs of inflation around the world. We are working hard on it and we will tell you much more next week.
Okay. Could I maybe try my luck and just press and say, of course you'll be working on the transformation plan, but is there a material impact you're expecting kind of in the near term from the activities?
Yes, we do. We already have some impacts this year, what we call the speech phasings. Also next year we will have the first impact of the transformation. Yes.
Okay. Very clear. All right.
Thank you. We'll take our next question from James Rowbotham from Deutsche Bank. Please go ahead.
Morning, everyone. Yeah, just one from me. Frédéric, you have almost EUR 1 billion of operating profit year to date. Last year you did EUR 40 million in Q4. As it stands, it looks like yield and fuel cost headwinds alone could maybe reduce that by up to EUR 100 million year- on- year.
On CASK, ex-fuel, is it realistic to think you could generate a EUR 100 million tailwind to offset? I think that would be around a 2% reduction in non-fuel unit costs at constant currency. If so, can you just make it clear what's driving that, please, and why it's so later to the Q4 after the non-fuel unit cost went up 40 basis points in Q3. Thanks.
Let us wait for the Q4. It's true that last year we have some base effect and one-off in the Q4, which means that we really expect a contribution of the unit cost in the Q4, which will be significant and leading us to be on, as I said already, on the right side of the range we give to the market. Yeah.
Could you remind us what those base effects were? Sorry.
Some specific treatment in the maintenance, for example. Yeah. Which has impacted the unit cost development in the last quarter of last year.
The labor deal.
Sorry?
-The labor deal.
The?
Labor deal we made.
Yeah. Sorry. Also the labor deal. As you know, some labor deal has been negotiated and had a significant impact, for example, in November, in Air France, where following the arrival of Ben, the labor deal has been settled and paid for 2018 in November.
Understood.
Yeah.
Thanks very much.
Thank you. Our next question comes from Andrew Lobbenberg from HSBC. Please go ahead. Your line is open.
Hi there. First question over at KLM. Can you just update us on what the situation is with the labor tensions? Are they all over? You will take the caterers who I think are still depriving the poor KLM passengers of fine Dutch food. What's happening with the other crew groups at KLM? Can you just elaborate a little bit on this EUR 10 million payment to Delta Air Lines in the quarter from Air France relating to the strike.
Can you explain how that works? Slightly related to that, does that play across to the North Atlantic unit revenues in any way? If you just compare your North Atlantic unit revenues this quarter with your comrades who've reported over here in London, they look to be trading rather better on the North Atlantic than you. I appreciate they've got a different capacity trend than you, but it looks quite different.
For KLM, I give the floor to Erik, CFO for KLM.
Okay, Andrew. For the labor agreements in KLM, you know we have three groups. We have agreements with all ground unions. It's looking very positive for the cockpit unions. The biggest problem is with the cabin unions. We have not found an agreement yet. We don't think there's a lot of willingness to strike.
We may expect some actions in the coming weeks. We also are positive to find an agreement in the coming weeks. For catering, it's a bit different. For catering, it's more a national theme, where Schiphol is very much used to get some exposure. That is not yet agreed, and I have no news on that one. It's relatively small for KLM. Indeed, our long-haul fleet is not touched by it. It's maybe the, as you've experienced, the European regional fleet, where we had to decide on some days to fly with minimum catering.
The impact coming from the [genie], Steven?
Yes. It is related actually to the EU compensation which Delta paid on behalf of us. Nothing to do with something else. It's just to pay off what they paid for us on the EU261 compensation.
Is it fair to say that is a pressure on the bottom line of the group?
To unit cost?
Yes.
Yes. It impacted the unit cost. It's a one-off in the unit cost, this quarter.
Okay. Cool. Can you explain, or can you give us any color as to why the North Atlantic is down 2% and your IAG have produced positive RASK on the North Atlantic?
First, I have not in mind. Sorry, what is the capacity development of BA during the quarter? If you look, for example, at Air France-KLM.
Yeah, they're close to flat.
+1.7, I think, by half. If you look at what has been developed by IAG at the North Atlantic. If you compare the -1.7 to the plus four, there is clearly a gap in terms of development of capacity, which can contribute to explain the gap in terms of unit revenue. Second, also, you can have a difference in terms of 2018 base. The Q3 2018 North Atlantic was extremely strong into Air France-KLM, + 4%.
When I remember that IAG was flat during the same quarter, just by half, you will check these numbers, I suppose. We are also different in terms of base effect. Yeah? Base effect plus development different in terms of capacity can explain probably a large part of the explanation compared to the 0% of BA and what I show you in terms of unit revenue, - 0.8.
There is in fact a difference. After that, I know that the two are corrected for currency, but you have also that the nominal currency for BA, which is pounds and euro, probably vis-à-vis the U.S. dollar, a bit of a different impact during the period. I can just say that for the time being. Having said that, and as somebody living in London, you know that perfectly.
It is true that the level of competition on the North Atlantic route out of London and out of continental Europe is a bit different. You know the story that out of Paris, you have 10 or nine now, nine airlines flying between Paris and New York. Clearly, the intensity of the competition is a bit stronger out of continental Europe compared to what it is in London congested Heathrow Airport.
Okay. Thanks, Frédéric.
Thank you. We'll now take our next question from Johannes Braun from MainFirst. Please go ahead.
Hello, good morning. Three questions from me. Firstly, could you share any early findings of the McKinsey study that was conducted in September, in particular, what potential cost savings is for 2020? Secondly, on the 2.5% capacity increase you are planning for the winter season, especially the 4% increase for long haul, isn't that optimistic in light of the still shaky demand environment?
Just wondering if this is a reflection of recent insolvencies in Paris as well, or any market share fights, or whether you expect demand to recover to that extent in 2020. Lastly, Aéroports de Paris has applied for increasing airport fees for the next regulatory period. I guess this is not in line with what you want, so just wondering what your line of argumentation is here. Thank you.
Okay, I take the second one and Steven will take one and three. Sorry. It's 2.5% including Transavia. Again, Transavia, as you know, and based on their relatively good performance, is increasing more than the rest of the group. If you exclude Transavia, we are rather close to 1%- 2% for the main line. It is more reasonable, and not the 2.5% you just described. Concerning McKinsey, Steven?
Yes. The full transformation, which we will present next week, is based on the McKinsey study. We started with the McKinsey study, and we did our own deep dive on where we think we can reduce further cost and increase revenues, and which we will present next week. Regarding Aéroports de Paris, yes, of course, we are not happy with the development on the tariffs.
For next year, it was already in the framework. We are currently discussing the framework for the years after 2020. Our opinion is that we should go for a further reduction in tariffs instead of increasing the tariffs. We are in that discussion with them also on the future of Aéroports de Paris in terms of construction. We are also having, let's say, all our wishes in terms of improving the performance of Aéroports de Paris.
You are lobbying for decreasing fees instead, right?
Fees and fees. That's right.
Thank you.
Thank you. We will now take our next question from Malte Schulz from Commerzbank. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking my question. First of all, if you can maybe put a little bit more color also on your APAC outlook, or what do you think, for the rest of the year? We're looking a little bit into 2020. Do you have any signs of that it's kind of recovered, particularly in the China demand? If there's no recovery, would you also adjust the capacity a little bit more in this region?
Additionally, you also targeted that you look already into cutting further on Air France domestic capacity. Is there also anything, with the new agreement, you get also more flexibility on your mid-haul, long-haul side? Is there also something that you plan to restructure, kind of your medium-haul network out of Air France-KLM, also to Africa? Maybe exchanging wide-body aircraft to narrow-body aircraft to cut on cost there?
For the Q4, there will be a bit less capacity to Asia. We expect to see a better effect, probably LATAM, a bit better than what we had since the beginning of the year. The first indication we have for the month of October was not too bad, I would say. If you want the flavor today that we have in terms of unit revenue, this is what I can tell you.
I miss the second question, sorry. Changing the network and the strategy medium-haul. Okay. I propose that for this type of thing, we wait for the Investor Day next week. It is typically the type of question that we can answer together with Ben and Pieter.
Okay.
Ladies and gentlemen, as a reminder, to ask a question today, please press star one on your telephone keypad. We will now take our next question from Michael Kuhn from Société Générale. Please go ahead. Your line is open.
Good morning. There was one, I would say, worrying trend in the unit revenues in the Q3, and that was that premium, I think for the first time in many quarters, underperformed economy by 1 full percentage point. Could you provide us some more details on what drove that development?
Was that French corporates, or was that also driven by point of sales outside France? Sticking with that topic, is that a trend that you continue to see into the Q4? A sustained weakness in premium demand, or would you see that rather as a temporary dip in the Q3 and recovering soon? Thank you.
Of course, this is a difficult question. It's clear that the corporate booking segment is soft today with European corporate guidance. We have seen some cut in travel budget. You see that when you speak to bankers. You know that, of course, if you follow other sectors, that for the time being, let us say, many sectors, situation is not dramatic, but there is a lot of uncertainty.
As a result, it's true that we have seen this new behavior of some, it's mainly European, I would say, but also French. That we have seen a softer trend in terms of demand for travel of corporate clients. It's also true for French, with a negative demand trend, which is visible since the beginning of the summer.
Now I cannot tell you if it is for how long. You know the source of uncertainty right now. You know also today the specific situation of, I would say, relatively significant numbers of country. If you do business with Lebanon, with Argentina, with Brazil, with Hong Kong, with Algeria, with Sorry?
China.
I don't know that you are really inclined to do these trips right now, and you will wait a bit before to reopen your discussion with your business partners in these countries. I think that the risk today, I forgot Ecuador.
Chile.
Chile. Okay. I will not make the long list of the country which are now right now a bit in a, let us say, in a bit unstable situation. We hope that they will all find the way to recover and to stabilize politically and economically the situation. Let us say that for people like us, which are supposed to help people traveling between all these countries, we can just admit that the situation is not optimal, and it can be one of the explanation behind the softer demand for premium.
We have observed out of the European market and out of the French market. When you look to the comment of Delta, if you come back to the North Atlantic flights, they were already indicated that the non-U.S. point of sale has been impacted by uncertain economic outlook. I think that it is not only our feeling, but it is a feeling which is shared by some of our colleagues.
Maybe just one quick follow-up. As you mentioned corporates, is there a particular weakness in some sectors, so financial companies or automotive companies, or is this rather a broader weakness across the board?
I have not the detail of what are the most impacted sectors, I should say. Automotive, surely. Well, probably the PSA, Chrysler, Fiat can create new opportunities of travel for some managers of this sector. Again, I take the comments of Andrew some minutes ago concerning the route difference of British Airways and Air France-KLM in terms of each revenue to the North Atlantic.
When you look to the numbers published by British Airways since this morning, APAC is, in terms of CASK, corrected for currency of -3.7%. Latin America, -9%. Europe, -1%. AMESA, which should be, I don't know what, Asia? No, I don't know. AMESA, Africa, East. Okay. Well, I don't know what they are behind that. It is at 0%. I would say that all in all, Asia, we are at 2.8%. British Airways is at -3.7%.
Sorry, Europe, they are at -1% , we are at 0%. North America, it's true, this is different. In Latin America, we are at 7%, they are at -9% . I will say that globally speaking, if I just take, I am not trying to open discussion with our colleagues from British Airways, but let us say that we are, I will say, a bit facing the same environment.
Of course, we know the specificity of the London-U.S. route, where British Airways is benefiting of the congestion of the airport and its big market share on these specific routes. The idea is that a bit everywhere we are facing is a softer demand coming from the business travelers, I think is probably a reality which is shared by a lot of airlines through the industry.
Let us wait also for the result of Lufthansa next week to compare, but I think it seems something which is, alas, it's not good news, but shared by a lot into the industry. We take a last question, if you want.
There are no further questions, thank you.
For your attendance. I suppose that we will meet a lot of you next Tuesday for the Investor Day into the beautiful city of Paris. Not sure that the weather will be sunny, but I am sure that the meeting will be interesting. Have a nice weekend. Thank you.
Thank you. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.