Air France-KLM (NR, BB+, BBB-)

AFFP has been very open in its roadshow about weak margins vs. comps including one that came to primary yesterday; EBIT at 5.7% to end FY23 vs. IAG at 12% and Lufthansa at 7.6%. There are a couple of caveats we wanted to add to roadshow figures;

• FOCF was €140m for Q1 which was weak for airlines that benefit from Q1 WC seasonality cash boost. It's pointing to a €730 one-off drag, including €120m in deferred social charges and wage taxes. Company noted it has €1.6b left in deferred charges out to 2027 that may continue a one-off drag.
• Net leverage is quoted running in low 1s (1.3x to end in March) but this is on a sizeable cash pile of ~€7.5b. Total debt is ~€13b and leaves gross leverage at ~3.3x. It treats its quasi-equity/hybrid instruments (~€3.5b) as full equity under IFRS & hence excluded in above figures. It is guiding to refi-ing this into normal debt over "years to come".
• FCF is expected to be negative this year by analyst. Capex is running high for capacity expansion. No FCF guidance, but net capex guidance is at €3b vs. consensus for cash flow from operations of €3.1b.
• Among the light guidance we did get was non-fuel unit costs rising 1-2%yoy in FY24 - it implies flat to negative levels later this year (base effects will help as will strike/one-offs fading). Failure to see this trend would be clear negative & could see another round of analyst revisions down. Cargo is similar x-factor; company expects it to normalise but is volatile & no forward bookings to base guidance off.