Air France-KLM (NR, BB+, BBB-) Q2 (to June) Results

Unit costs rise was more mute than expectations and yields were actually flat. It's hard to draw the trend in why Ryanair, Finnair & Lufthansa are struggling on yields while easyJet and Air France are doing better; Air France said economy yields were down (-1.7%) with premium doing better (+0.6%) - but that didn't show in its budget carrier Transavia where yields were a still strong +4.5%.

It was selling off into earnings and is another +18-20bps on the 28/29s today - moving new 29s wide of Finnair for the first time - which seems a little harsh. Finnair has bottom of the pack margins itself, single carrier exposure and a similar levered BS (when including Air-France's perps). It's an easier credit to follow with less moving parts and has explicit government rating uplift. But Air-France has govvie ownership as well (France 28%, Netherlands 9%) and as a positive on getting future support, had state Aid from Covid being ruled as compliant by the EU recently.

Based on this year's Capex guidance and stated leverage targets Air-France's BS will not get any support. 1H seasonally strong cash flows were already used up by €2.1b in capex and though maturity profile is light this year, it does have overhang supply risk from the €3.6b in subordinated perps that it said it will eventually refi into normal bonds. Lack of a positive catalyst has been our driver for flagging caution on the curve (instead preferring Finnair). But levels here are harder to ignore, in particular the €26s on BVAL offer side at Z+103/B+143/4.1% looks attractive for stub (<2Y) risk. We are weary of duration ahead of mgmt still flagging falls heading into Olympics - the peak impact of that will be in the 3Q (July-August). We will circle back on 28/29s after then or if the sell-off continues.

Outside AFFP26s now, Finnair remains our only value view in Airlines (at Z+227). Given its 1H results as well (rough FY EBIT guidance) we would caution investors expecting any positive catalyst to the BS - only excess carry we see and please note the vol investors may need to stomach in Finnair (graph the now pulled FOY25s).

• Q2 passengers +4% while capacity was +4% leaving load factor flat at 88%. Yields were flat to leave passenger unit revenues also flat (+0.2% in constant currency terms). Some stability on yields vs. peers. April RASK was +2.8%, May +1% and June -3.1% which it says reflects the Olympics impact.
• Financials: revenue €7.9b (+4.3%), EBTIDA €1.2b (-9%), EBIT €513m (-26%) at a 6.5% margin (-270bps). EBIT fall is nearly equal parts from fuel and unit costs ex fuel (+1.7%).
• Within the group Network carriers Air-France & KLM combined and including cargo (85% of revenue) ran a 6.7% margin (-390bps). Margin dragged by salary increases, fuel, airport tariff increase in Paris and the Olympics.
• On Cargo it says worst of unit falls are behind it with -4.4% this quarter but June showing +3% improvement and that red sea disruptions is benefiting Asia. Cargo was 7% of group and included in the 85% above.
• Budget arm transavia (10%) ran a 3.1% margin turning around from last year's breakeven. Impressively it managed to increase capacity by +12% without load factor decline and still edged a unit revenue increase of +4.5%.
• Maintenance (6%) ran a 3.1% margin (-130bps) despite the +22.6% increase on headline. Its pointing to supply chain disruptions interrupting operations.
• Net debt (incl. €5b in leases) was €6.2b up from €5b at the end of last year on €835 more lease debt. It has LTM EBITDA of €3.9b against it to report net leverage at 1.6x (+0.4x yoy) which it says is within guidance for 1.5-2x. Removing the €7.2b in cash & eqv's its gross 3.4x.
• Reminder this also excludes the €3.6b in subordinated perps that are classed as equity (in full) but it will eventually refi into normal bonds - neither fitch nor S&P treat as equity. Including it, it is 2.5x/4.4x levered.

• Guidance is for 3Q to be impacted by €150-170m from Olympics diverting tourists away (2Q impact was €40m). Nice question from an analyst in the call was how Delta can have a €100m impact and Air-France only ~€200m; mgmt said ask Delta.
• Unit cost for the FY are expected to be up +2% (prev. +1-2%), group capacity to be up +4% (prev. +5%) and net capex <€3b (prev. at €3b).
• On fuel its 70% hedged for the year at what seems to be a tad elevated 901 and 34% hedged in 2025 at undisclosed price. Spot at low 800s {JET1NECC Index}