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Edited Transcript of AF.PA earnings conference call or presentation 16-Feb-18 7:30am GMT

Q4 2017 Air France KLM SA Earnings Call

Paris Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Air France KLM SA earnings conference call or presentation Friday, February 16, 2018 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Frédéric N. P. P. Gagey

Air France-KLM SA - CFO

* Jean-Marc Janaillac

Air France-KLM SA - Chairman, CEO and Chairman of Air France

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Conference Call Participants

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* Anand Dhananjay Date

Deutsche Bank AG, Research Division - Research Analyst

* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Daniel Roeska

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* James Edward Brazier Hollins

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team

* Michael Kuhn

Societe Generale Cross Asset Research - Equity analyst

* Neil Glynn

Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator

* Ruxandra Haradau-Doser

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

* Stephen Furlong

Davy, Research Division - Transport and Logistics Analyst

* Yan Derocles

ODDO BHF Corporate & Markets, Research Division - Analyst

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Presentation

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [1]

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Ladies and gentlemen, good morning. Good morning to those who are connected via webcast and on the phone. Together with Frédéric Gagey, our CFO, we are pleased to welcome you to the presentation of our full year 2017 results. Before I hand over to Frédéric let me start with a few introductory remarks.

First, 2017 was a year of major achievements for Air France-KLM. As planned we resumed our offensive and achieved stronger growth than in previous years. In 2017 Air France-KLM was a leading European company in terms of traffic expressed in RPK. The group carried more than 88 million passengers across 5 continents, 5 million more than in 2016.

Second, this growth was accompanied by a major improvement of the group's economic results and its financial structure. 2017 was also a year of important successes in the deployment of our strategic plan Trust Together particularly in terms of partnerships. Firstly with a project of creating a single, global joint venture between Air France-KLM, Delta and Virgin Atlantic, and secondly with the intensification of the partnership with China Eastern. We have also further deepened our cooperation with the Indian carrier Jet Airways and with Vietnam Airlines.

Concerning Joon we also achieved our objectives on schedule with the launch of the first flight in December 2017 to 4 European destinations and the opening of new routes including long-haul as of the summer season. Before commenting on the group's outlook for 2018 I would now like to handover to Frédéric Gagey for presentation on our financial performance in 2017.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [2]

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Thank you, Jean-Marc. So let me take some of your minutes to present the results for the last quarter 2017 and the full year. First, the last quarter, it is as the rest of the year characterized by an improvement of the operating results, plus 20%. We move from EUR 94 million to EUR 113 million and also as the rest of the year the first 9 months we have the continuous increasing revenue which is at plus 2.4% at -- without correction for the charge and plus 5% if you take into account the correction for the ForEx, mainly the weaker dollar in the last period of the year.

Of course the most important point for us is last quarter 2017 is a net result. We had a loss of minus EUR 977 million which is a quite impressive number, of course. But I think that you are all well informed about the demand which is coming from the accounting effect of the derisking of the function from pilot's KLM. We have informed you about this operation in October with a quite precise press release indicating what was a contribution of this pension fund to the group equity. And according to IFRS the effect of this derisking is to take in the P&L and not in the equity. It is a specificity of IFRS.

The effect of this derisking, so we booked a loss of EUR 1,196 million which is again noncash, it is purely accounting. It is just recognizing an asset which in essence was not really an asset for the company itself but more for the pension fund. So we are extremely happy with this move of 2 pension funds of KLM from a defined contribution to -- sorry, to a defined benefit status to a defined contribution status. So I think it has been a good negotiation, derisking the balance sheet of the group.

2017 I think that we can characterize that year as a good one. We have growth in revenue, good improvement in the operating result and operating result at EUR 1.488 billion, quite close to the consensus we published. And this is an improvement of 42% compared to last year and an operating margin increasing by 1.5 point at 5.6% (sic) [5.8%].

If you look at the lease adjusted operating result, you know that for comparison with some peers it's better use this item. We have EUR 1.851 billion, an improvement compared to last year of 32%. The net result is negative, again not a surprise. It is of course only the result of the derecognition of the pension fund of the pilots but also of the cabin crew of KLM. You remember probably that we have made the provision for the cabin crew in Q3 and for the KLM pilot pension fund in Q4, and then in total it results in a accounting negative impact of EUR 1,429 million. You can also see on the slide too all the elements which have to be taken I think into consideration, the first one is ROCE which is above 11% and the second one is the level of the operating cash flow and operating free cash flow close to EUR 700 million which is also, I think, a good result in terms of improvement of the balance sheet of the group. As a result also because of the capital operations we managed in 2017 you add in a reduction, sorry, of financial net debt close to EUR 2 billion, so we have today a financial net debt of EUR 1.6 billion and adjusted net debt move into the same direction of course and has reduced by EUR 2 billion, EUR 1.9 billion during the year 2017.

As a result, the ratio we are following quite carefully into the group. I mean, the adjusted net debt divide by the EBITDA moved from 2.1 which is a reduction of 0.8 during the period. So here also this is a good illustration of the improvement of the balance sheet. 2017 is so in the trend we have observed already for more than 6 years. You have on the slide the evolution of the lease adjusted operating results, operating cash flow and the adjusted net debt on EBITDA since 2011 and you see that it is long period of continuous improvement of the situation both in terms of production of cash but also in terms of solidification of our balance sheet.

What are the main explanation we have in the result of 2017, it is a strong improvement in network, the network operating result. You see for the full year that the improvement is of EUR 379 million, a noticeable improvement in Transavia. You remember that Transavia last year was just breakeven, Transavia I mean Transavia France and Transavia Holland have improved seriously the result over the last year and reached an operating result of EUR 81 million, so it is an improvement of EUR 81 million which I think is quite impressive due to, if you consider the stronger competition or the fierce competition on the European market.

The maintenance is continuing, delivering positive of gross operating result, slightly decreasing last year for the reasons I will explain later. So concerning the network, I think it is a year characterized by a relatively strong growth. We have improved the capacity by 2.6% and the traffic by 4.3%, reaching as a consequence a load factor of 86.8%, an improvement of course compared to last year 2016. And concerning the unit revenue, as you know we have observed during the 4 quarters of the last year a continuous improvement of the situation. The unit revenue was negative in Q1, positive in Q2, even more positive in Q3 and close to 2% in the last quarter of the year. As a consequence we had a RASK over the full year 2017 close to 2% compared to 1 year later. You also can note the strong improvement in terms of ancillary revenue. We are developing a lot of product, improving the capability for the passenger to buy these ancillary revenues. And during 2017 these revenues have increased by 13% versus the year before.

In terms of network of course the year 2017 is characterized by an improved situation on Latin America where you see that with stable ASK we have been able to increase significantly the RASK. We also see the improvement in Asia where we have more or less the same situation, capacity slightly increasing but quite good improvement of the RASK. In the North America also the market has been dynamic. We increased capacity by 4%, the traffic by 6% with almost stable unit revenue. And lastly (inaudible) I would like to indicate the development in the medium-haul hubs both in Amsterdam and in Paris when there has been during the year a strong improvement of the ASK, 5%. The traffic increased more, 7%. So RASK being positive, 2.4%, compared to 2016.

Still some weakness in Africa due to the impact of the low fuel price which is impacting, so it's the economic situation in the oil producer countries of Africa. So in total RASK of 1.8% and in long-haul a RASK of 1.9%. Behind these numbers you can imagine what has been the evolution of the operating income networks by networks. Of course we have improved on the 2 hubs medium-haul which have improved well compared to the year before. We have also improved the long-haul profitability by more than EUR 200 million. And there is one point which is your concern, mainly for Air France which is a domestic market in France where the operating result deteriorated compared to 2016.

(inaudible) contributing to the improvement of the result is cargo. Cargo, it is quite new situation for the cargo teams. As you know, the experience in the last year, extremely difficult situation with declining both unit revenue and traffic. So year 2017 is exactly the opposite. You see that the unit revenue has improved continuously over the year coming from minus 5% in Q1 to plus 9% in Q4 which is clearly something totally new for the cargo environment. And we had also during the year an improvement of the traffic. We have increased ATK by 0.9% but the RTK increased by 1.8%, so almost 2%, explaining why we observed during the year this improvement of the load factor, so clearly some good news which is extremely new coming from the cargo activity.

Transavia, I already discussed that. What is most important for us is strong improvement of the profitability of this low-cost activity in 2017 coming from 0 in '16 and reaching EUR 91 million in 2017, it's explained by many, many things. First, strong increase of capacity, 12% in France, 10% in the Netherlands, very good development of the unit revenue. You have that on the bottom left of the slide. You see unit revenue negative in Q1 and positive in Q2, Q3, Q4, and even close to 10% for 6 months during the second and the third quarter which means that as a whole for the full year the RASK is improving by 6.8% and on top of that of course thanks to the development of the capacity the unit cost has been -- have been decreasing, so both element contributing to the improvement of the profitability of Transavia.

The maintenance, we continue to have a solid margin concerning the activity with third parties. The total margin for the maintenance is 5% which is quite solid and strong. Slight decrease however compared to 2016 explained by many elements, one is some problems in the supply chains of all suppliers, not of Air France-KLM but all the suppliers. Also the fact that as you know in the industry (inaudible) situation of the suppliers since maintenance helps them to introduce some price escalation closer since that contract which playing of course negatively on the margin in airlines. And I -- also to indicate the better performance in the Airframe activity.

Concerning the order book, the target we gave to you at the beginning of the year was EUR 10 billion. And so the sales team of the maintenance have reached their target for the year 2017. We have today an order book of EUR 10.4 billion, so a bit above what we indicated at the beginning of the year.

Concerning the cost, we are not too far, I would say, from our target. I have indicated in Q3 that the cost will be slightly negative. They are at plus 0.1. If you want to be more precise, it is even plus 0.09. So it's really quite close to what we have indicated. If you correct for the load factor effect of, the effect of the profit sharing so you need cost decrease at minus 1% over the full year. So also close to the range we had indicated in Q3. I have indicated in Q3 that we will be between minus 1 and minus 1.5. So we are just where we were expecting to be. It is explained by many, many elements. Once of them is a good level of evolution of our productivity. If you look at the productivity by comparing the FTE and the EASKs, the equivalent variables in kilometer you observe that the global number of FTEs for the group has decreased by 400, mainly in Air France. Air France has decreased FTEs by 850 and KLM a slight increase of plus 400 people.

And thanks to that if you create the ratio of FTE evolution to capacity development we have a productivity of plus 4% in Air France, plus 3% into KLM. In terms of control of the -- sorry, the slide before -- in terms of control of the labor cost, you have on the slide the evolutions of the labor cost between 2016-2017, so a slight increase which is entirely explained by the profit sharing. If you exclude the profit sharing which is coming off the quite good result development over the year and the necessity to share part of that with our employees, you observe that excluding profit sharing the labor cost has been flat between 2016 and 2017. So a good control of labor cost only explained in the evolution by the profit sharing.

Nothing to say about the fuel bill, it is down EUR 90 million in '17 compared to 1 year before. Just to remind you that the hedging was negative in 2016, negative EUR 862 million, it was close to 0 in 2017, so clearly a contribution of the less negative hedging between the 2 years. And so evolution coming from the price on the market and also the currency. But in total, fuel bill of almost stable let us say during the year 2017 compared to 2016 which means that if you take all this amount together clearly your last part was a improvement of the operating income between the 2 years, it is explained by the commercial performance.

You see that the contribution of the unit revenue is estimated at EUR 447 million. Again it is explained by many elements. The environment, the balance between demand and supply, but also I think by the extremely efficient and good work made by the sales teams. You are not selling tickets just waiting for the clients, we have develop a good system in terms of revenue management in order to manage your yield, you have to be present into the markets by developing your communication and your presence close to the clients (inaudible) which is explaining I think this extremely good performance in terms of sales during the year 2017 contributing strongly to the improvement of our operating result.

By airlines, improvement into the 2 companies. Lease adjusted operating margin improved by 1.2 point in Air France and 1.8 point in KLM, KLM making in 2016-2017, so an extremely good performance. In terms of operating margin, if you compare the KLM results to the rest of the European industry the free cash flow, I think that we can characterize 2017 as a year with a strong free cash flow. It is close to EUR 700 million. We had a cash flow before voluntary departure (inaudible) change in working capital of EUR 2.8 billion. We invested EUR 2.2 billion. You see that the change in WCR and the cash impact of the VDPs are almost the same. So it is really a pure operating free cash which has been produced in 2017 and again close to EUR 700 million. So it explain of course partly the evolution of the financial net debt where the financial net debt of EUR 3.6 billion in 2016 December and 3 elements have contributed to its reduction, first operating free cash, EUR 700 million. Second, the reserve capital increase with Delta in China Eastern which was EUR 700 million also to the group and last amount the exercise, soft call exercise of the OCEANE we managed in the last quarter of 2017, so roughly speaking we are 1/3 for each of these elements, correction to a reduction of the net debt of close EUR 2 billion. If you look at the adjusted net debt the evolution is the same. Where evolution of the adjusted net debt also close to EUR 2 billion versus year ago. And if you look to the ratio adjusted net debt to EBITDA it moved from 2.9 in 2016 to 2.1 in 2017, which is I think a new contribution to the improvement of the balance sheet of the group.

Just as we speak about the debt to discuss [once again] the IFRS 16 implementation, you know that we have taken the decision to implement IFRS 16 but also IFRS 9 which is mandatory and IFRS 15 which is also mandatory at the beginning of the year 2018, so of course we will have together collectively to change progressively the framework in which we work. We have put on the slide some impact of IFRS 16 both into P&L and the balance sheet. First result we expect that the new debt according to IFRS 16 will be lower than the adjusted net debt you compute and we compute by adding 7x operating lease to the financial net debt.

We expect this reduction to be between EUR 2 billion and EUR 2.4 billion. Of course it is not yet final numbers. We continue to discuss with our auditors. But it will be the order of magnitude that we have today in mind concerning the calculation of the new IFRS 16 net debt when we try to compare it to the adjusted net debt we use before with the 7 times operating lease adjustments. So we will produce in Q1 the final number, but again it will be characterized by evolution of the IFRS 16 net debt compared to the number you have in mind today.

At the level of the P&L there will be also a big change. The EBITDA will disappear because there is no more operating lease. The operating lease will disappear because they will be replaced by the amortization or the right of use. The EBITDA will increase because partly as the interest component in the operating lease will go below and the cost of the financial net debt will increase. And in total of course I think it is the magic of IFRS we hope that the net result will be the same as before because if not it will be of course a problem.

[At the level of the] balance sheet the asset will increase because you will take the operating lease and you will consider that as the inception of the contract right of use asset, so you will have in the future higher level of fixed asset. And on the other side of the balance sheet you will have as a compensation of course an increase of the debt because the debt will now integrate as operating lease considered by IFRS 16 as a long-term debt, so this is for IFRS 16.

Mandatory for 2018 are IFRS 9, IFRS 15, they will have probably minor impact on the current operating income. IFRS 9 would simplify I think the way some financial operation and options are taken into account. In IFRS 15 as there is some time effect, some revenue will be taken into account a bit later or a bit earlier but no big impact at the level of the P&L. Just to come back on the net pension effect of the derisking of the KLM cabin and pilot pension scheme. I think that the most important in the slide is what is on the right and on the left. Before the derisking at the end of 2016 the level of pension asset and pension liability recognized in the balance sheet were EUR 20 billion, what was recognized was a net balance.

And in 2017 the asset and the liabilities now taken into consideration to calculate the net balance have been reduced by almost one half. The asset is now only EUR 9 billion and the liability close to EUR 12 billion, so clearly we are derisking the responsibility of the group vis-à-vis the pensioners and the employees by having transferred this defined benefit plans to a defined contribution system.

What to say about the outlook for the beginning of 2018, first, if you look at the long-haul forward bookings for the Q1, as they are positively oriented compared to last year, in spite of the increase of capacity so I think we are increasing capacity and in spite of that the booking load factor is increasing, so I think it is a good news, just demonstrating that in volume there is -- the demand is there and we have passenger booking more on capacity which are also increasing. So I think it is positive feeling we have concerning this first quarter.

Second, when we speak with our teams of the revenue management of the group, they expect to have in Q1 a positive unit revenue, partly helped to be accounted by the fact that there was a Easter shift and you see that when you look at the long-haul for our booking of March and April. Clearly there is a swap between the 2 months due to the holiday effect which can help also the improvement of the positive unit revenue we expect for this quarter.

Then I can create also a link with what we announced concerning the month of January. In January we have announced that the unit revenue will be probably flat. Just to be more precise, it is positive in long-haul, positive in medium-haul. The only network when we had a negative unit revenue is domestic France which is explained by 2 reasons, one is a shift of holiday of Christmas period, we had 1 year of holiday coming to January which has an impact on the business traffic. The second effect of course which will be more (inaudible) for the year 2018 is impact of the high speed train development to Bordeaux and to the east of the country.

Concerning the fuel --

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [3]

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West, west.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [4]

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The west of the country, sorry. Concerning the fuel bill, okay, there is a quite strong volatility in the fuel price as you can see. It moved from USD 62 to USD 64 between last week and the current week. Based on the forward curve of the last Friday we have for the time being calculated the fuel bill 2018 at USD 5.7 billion compared to $5 billion. So it is an increase of $650 million. So we compared to last year if I look at the euro the increase of the fuel bill between 2017 and 2018 is of EUR 150. We are of course protected by the hedge portfolio we have accumulated during the last months. We are today hedged at 60% for Q1 and Q2 and at 51% for Q3 and Q4 and the current valuation of hedge portfolio is in the range of EUR 300 million.

And you have for the specialist the fuel bill sensitivity curve, next slide please. So just to finalize this outlook for 2018. First, we continue to develop capacity. As expected passenger network will be between 3% and 4% and Transavia between 6% and 7%. We have budgeted a unit cost reduction which is between minus 1% and minus 1.5%. So we continue to stick to the same approach concerning the unit cost and of course it is excluding currency fuel and pension expenses. Concerning the CapEx, we will continue to manage our CapEx in order to reinforce the balance sheet of the group and it will manage between the long-term target we indicated to you some years ago already between EUR 2 billion and EUR 2.5 billion, and we see as a usual we expect positive operating free cash.

Concerning the adjusted net debt to EBITDA we will give you a more precise target in Q1. We have for the time being to move from the old system to IFRS 16. We have to discuss with you during the presentation of the Q1 what are the new data concerning the debt of the group and based on that we will discuss the target at the Q1 results. Thank you, Jean-Marc.

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [5]

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Thank you, Frédéric. Let me now say some words of conclusion before we open the floor to Q&A. Thanks to our own efforts and to our positive business environment our 2017 performance is satisfactory but with a different level of profitability between Air France and KLM. KLM continued in 2017 to improve its performance and its profitability and its profitability is now comparable to the one of our main European competitors. Air France has also improved its performance in the French unfavorable context of general competitiveness for air transport. The [Air Transport Assis] that are a series of conferences which will begin over the coming weeks are extremely important and we have high expectations.

We are notably counting on the French authorities to realize the importance of closings the competitiveness gap that is negatively affecting French air transport compared with other European states. We started 2018 with a prudent stance. On the one hand the fundamentals of our industry remain robust with IATA forecasting profit growth of 6% in 2018.

On the other hand we will have to contend with the rise in oil prices and fierce competition. The backdrop of our activities therefore looks more challenging in 2018. In this context we will leverage our 2017 achievements to pursue the offensive and maintain the profitable growth momentum. To capture our share of the industry growth our ambition is to offer our customers the most extensive network. Today a major part of our activity is organized around the hubs of CDG and Schiphol. Some 65% of KLM passengers have connection and 45% of Air France passengers have connections.

To contend with the competition and enhance further its network offer it is vital that the group takes part in the consolidation that is unfolding within the sector. To that end, as you know, we have elected to play the consolidation game in the long-haul through alliances, capital-light and flexible strategy. This is why in 2017 we took some major steps via the different agreements I mentioned in my introduction combining both capital and commercial links.

Firstly concerning our new Transatlantic joint venture with Delta and Virgin the new JV is right on schedule. We have completed the negotiation on the JV contract which is in the signature phase and it will be submitted to the U.S. DOT and DOJ for approval. We hope that the effective realization of this joint venture will take place early 2019. Air France-KLM will thereby acquire a 31% stake in Virgin Atlantic.

We believe that the joint venture is a right response to the competitive pressure from the low-cost long-haul carriers by offering a nonrival network benefiting from more growth potential and generating more commercial synergies. We are also engaged in an offer and product offensive with Delta. We are thus developing a new branded fares proposition enabling price offers that are closed to those posted by the low-cost competition.

Secondly, we have also reinforced our partnership in Asia. In China, thanks to our partnership with China Eastern we are already the leading European Carrier at Chinghai Airport and we are going to position ourselves favorably for the opening of the future Daxing Airport close to Beijing.

Lastly, in the Indian market which offers a very robust growth outlook, the development of our agreements with Jet Airways enables us to offer customers many more journey options between Indian, Europe and the United States thanks to access to our Transatlantic joint venture.

As planned we launched Joon in December thanks to the mobilization of the teams and the agreement signed with our flight crews. Joon will strengthen our long-haul network and feed our hub in CDG. The new airline is another of the group's responses enabling us to win back customers from the competition with an innovative offer and an adapted cost structure. Starting from May Joon will operate service to Seychelles that was closed by Air France a few years ago due to an inadequate level of profitability in the face of competition from the Gulf carriers, Gulf state carriers.

The initial results from Joon are encouraging. The airline has carried so far more than 300,000 passengers with a load factor close to 85%. Regarding the point-to-point activity that is short- and medium-haul without connection in one of the group's hubs, Transavia has proven its efficiency. Its success with customers continues to grow and Transavia carried nearly 15 million passengers in Europe in 2017 and it posted a clearly positive operating result, thanks to its cost structure which is comparable to the main low-cost competitors.

Transavia will thus continue to drive the group's growths in point to point in 2018 from its basis in France and Netherlands. We are also considering the development of Transavia Air France beyond 40 aircraft with the ambition to regain our plates in the French provinces. In addition or in order to contend the TGV competition and the relentless growth of low-cost carriers we are also working on the rationalization and optimization of Air France and Transavia on the French market.

Last, to combat the increasing competition we continue to focus on the customer with the implementation of a new distribution strategy and through digital innovation. Last November we just announced a new distribution strategy to be deployed as of this April. The aim is to develop direct sales contact on our websites and via IATA NDC. As an enriched messaging standard NDC will enhance communication between airlines and travel agency. It will allow the distribution of rich content and differentiated offers, facilitate the sale of ancillary products and creates a base for consistent response to customer needs on all channels and touch points. We have also revamped our Flying Blue loyalty program with a new offer to be rolled out to 15 million program members this April. The new program will be simpler, clearer and more flexible to further secure customer loyalty and should also enable the development of the partnerships. This is thus a key component of the customer service which is going to enable additional revenue generation.

In 2017 the group accelerated the digital development and investments to achieve its ambition to become the leader in customer intimacy on social media. 2017 was a record year with EUR 5.5 billion of online sales, 450 million visits on the websites, 34 million Facebook fans. Thanks to a big data platform the group is able to speak more personally to its customer, offer destination, adapt to their online and travel behavior or meet their expectation onboard via the right channel, e-mail, banner ads, push notifications.

As an example, KLM was in 2016 the first airline to send travel documents over Facebook Messenger, Air France followed suit in 2017. The group is now active on 13 social platforms. To answer the influx of customer questions Air France just created Louis, a first chat bot dedicated to baggage issues. This robot is based on the brick of artificial intelligence for the detection of the intentions of the user and is able to provide the status of the delayed baggage. Louis will soon be connected to voice assistance. In September 2017 KLM also welcomed its new service bot BlueBot to its service family. Further development will be realized in 2018.

To conclude, despite more challenging environment we are convinced that Air France KLM has the right setup to continue its growth in 2018. The commitment to reducing unit costs remains an absolute priority to achieve our goal of sustained profitable growths. This is a clear roadmap for the CEOs of Air France and KLM. I'm also firmly committed to preserving a sound balance sheet.

In this context we are going to pursue the deployment of our projects within the framework of Trust Together and as I announced in January via a new 5-year strategic plan. This medium-term plan to be unveiled in the coming months will enable Air France-KLM to build on its strength and regain a leadership position in the global air transport industry. Thank you for your attention. We will now move on to your questions. So we have time -- in order to have time for everyone please just one question each. Let's start with those on the telephone.

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Questions and Answers

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Operator [1]

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We'll now take our first question from Savi Syth from Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [2]

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I was just wondering if you could provide thoughts on the ancillary revenue side given the discussion of offering unbundled fare and just anything more that you're doing on the seat assignment side and what we should expect in 2018 and beyond on the ancillary revenue front.

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [3]

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You are quite difficult to understand because your communication is not that good, so could you repeat your question and perhaps talk closer to your micro. Thanks.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [4]

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Yes. So hopefully this is better. We're just wondering on ancillary revenue what we could expect in 2018 and beyond, especially this morning's discussion about the unbundled fare and the long-haul and then anything on seat assignments, I'm just wondering what we could expect as we get into '18-'19 on ancillary revenue initiative?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [5]

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They will continue to be extremely dynamic. We are developing new digital tools with new branded fares. We are also integrating the capability of the clients to buy more ancillary revenue. So in your model I think that you can continue to have growth rate close to what we have discussed this morning. If you look at the trend over the last years, it is something which is close to the numbers I have indicated this morning. So no problem that it will continue. As for the rest of the industry of course to develop in an extremely dynamic way.

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Operator [6]

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We will now take our next question from Ruxandra Haradau-Doser from Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [7]

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So significant deleveraging of the company over the last years and IFRS 16 will have a significant positive impact on adjusted net debt, so how do you think about dividend payment going forward?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [8]

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The forward payment are relatively flat over the next year. It is flat in the airlines. The pay mainly is a debt linked to the aircraft financing. And for the holding, I mean the group Air France-KLM there is no big repayment in 2019. There is one in 2020 which is hybrid. And concerning the dividend, we have -- I have already expressed that when I was meeting some analysts I was saying clearly that if the year 2018 is similar to the year 2017 then clearly the question of the dividend will become I think more and more accurate. Clearly we are happy financially speaking about the result of the year 2017. We are still putting the deleveraging of the group as a priority. But with result comparable next year to what we have in 2017 I think that the question of the dividend will become I think quite important and we'll have (inaudible) to discuss that with the Board and then to make some proposals to the shareholders.

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Operator [9]

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We'll now take our next question from Stephen Furlong from Davy.

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [10]

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I'm just wondering, have you looked at competitor capacity in 2018, maybe you can share your thoughts there, where do you see growth on either Transatlantic or the Asian markets? That will be helpful.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [11]

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Yes, we are mainly growing, I will tell you that, on the North Atlantic, also in South America, Asia a bit less than on the Atlantic, then Africa will be also close to Asia at 3%, Indian Ocean and (inaudible) will be a bit lower due to the competitive situation. And also in Middle East we are not increasing capacity. We are even reducing a bit the capacity for the year 2018. In total, it means that long-haul will go, as we have indicated, close to 4%. Concerning the hub medium-haul, will also increase. If you take together the medium-haul feeding the hubs of Amsterdam and Paris, the growth will be 3%. And of course on the France domestic, as explained during the presentation, we will be far more cautious for the reasons I have already illustrated. And then we will reduce capacity by an order of magnitude which is today expected to be minus 2%, so growth in long-haul, growth in medium-haul, feeding a bit less than long-haul and decreasing capacity on the French domestic market.

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Operator [12]

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We'll now take our next question from Damian Brewer from Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Could I ask you to elaborate about the premium traffic unit revenue results, please, in particular are all your markets now in positive yield territory on premium traffic and, if not, what percentage are this year versus last year and how are things trending for Q1? And where you have seen that development, is that due to price or is it due to selling mix?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [14]

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So I have (inaudible) the number for January concerning the gap between premium and nonpremium traffic. If you look at the Page 8 of the presentation you see that during the second part of the year 2017 there has been a huge gap between the evolution of the unit revenue with something extremely positive for the premium, positive but less concerning the economy, so based on what you observe today in terms of booking this trend will probably continue during the first quarter. And again for the period beyond the first quarter we have still not yet sufficient indication concerning the bookings to give you a more precise info.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay, but is the performance due to the price you're selling at or you're selling more of the higher booking classes in premium?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [16]

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Both of them.

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Operator [17]

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Our next question comes from Anand Date from Deutsche Bank.

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Anand Dhananjay Date, Deutsche Bank AG, Research Division - Research Analyst [18]

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I had one in Damian's line actually as well. Could you just talk a little bit about how you are seeing corporates and their travel budgets as it looks through 2018 when you talk to them? And then also within that I guess you won't tell us, but could you give us a rough idea of when we think about your long-haul profitability how much of that do you think comes from the JVs versus just the other markets?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [19]

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Okay, concerning the corporate world we had recently the weekly revenue meeting. I have to say that what is coming from the big account and from the BlueBiz program is extremely positive. So the business or the turnover of the activity concerned these 2 programs are increasing right now. So which is clearly linked, I think, to the economic environment of Europe and of other parts of the world. Of course per industry it can move a bit. You have some industry when it can be a bit less active, but globally speaking the big account and the BlueBiz programs are developing positively in terms of sales. And the second question was?

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [20]

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I must add something to answer your question. Indeed, yes, a big corporation or the smaller corporation tend to look carefully at travel expenditures. But the fact of being able to sign joint contracts in some of our key markets with our partners, Delta in Europe and (inaudible) GOL in Brazil, Jet Airways in India and so on is a very efficient way to persuade them to fly with our airlines because we are able to monitor better the expenditures. So these joint ventures are very important also for on the commercial side and very positive for our revenues and results.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [21]

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As you know, we never give any indication concerning the profitability by networks. So we'll not give you the margins on the North Atlantic JV but of course it is a large contribution to the global profitability of the long-haul network.

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Operator [22]

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We'll now take our next question from Jarrod Castle from UBS.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [23]

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I am hoping you can just clarify something. In your kind of outlook you talk about the fact that you wish to maintain a profitable growth momentum. So just in terms of language what does profitable growth momentum mean because your profits were up 40% on 2017 so should I be looking and interpreting it in terms of percentage change in momentum? And your profits were up about EUR 500 million or EUR 450 million in terms of absolute euro terms. So I guess what are you trying to message by profitable growth momentum is the question?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [24]

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So it's clear that we have two -- I think there is 2 elements here behind the word momentum. The first one is clearly we see the macro environment I would say rather positive. You see growth again in the French market, growth again -- increasing growth rate in Europe and some part of the world where the economic situation was difficult, I mean for example South America are improving. So which means that there is a momentum today in terms of demand. Second element to keep in mind, we have developed last year quite important steps strategically speaking as a fact to reinforce the link with Delta to integrate Virgin into the JV, is making Air France-KLM stronger to the North Atlantic. We have developed this new link which is something extremely new with Jet Airways in India. And we have also reinforced the links we have with a Chinese airlines. So altogether I think we are fine advance in terms of organization of our alliance network around the world and we are present in all the largest area where the traffic and the demand for airline transportation will increase into the next year. So clearly it's great, I think a strong advantage for Air France-KLM. And we think that developing this new capability of Air France's new partnership we are in fact in the situation to develop in the future a growth more profitable. So by employing both by the economic environment and the strategical steps we have achieved last year I think that indeed concerning the long-haul, medium-haul feeding the 2 hubs are today in a better position than before in order to beneficiate from the momentum. Now in terms of profitability, we know that the profitability of the group is not yet at the top of the profitability in Europe. I think we have been always extremely clear about that, but if you look at the evolution of our profitability since 2011, I think that we have shown that we are continuously improving, and of course we have to continue to do that using both the unit cost policy we'll continue to develop and the new environment created by the strategic initiatives we have taken in 2017.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [25]

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So I guess the expectation would be for profit growth in 2018 versus 2017 all else being equal?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [26]

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We know that you are always expecting some guidance concerning the profitability for the next year, but as you know, we are not making this type of announcement at the early beginning of a year. We are especially in Europe where we are seeing all extremely exposed to the change of the fuel cost, of the demand of the unit revenue because of the lack of consolidation in the European airlines industry, so, as you know, we don't give any guidance on the operating result for the year 2018 yet.

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Operator [27]

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Our next question comes from James Hollins from Exane.

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James Edward Brazier Hollins, Nomura Securities Co. Ltd., Research Division - Research Analyst [28]

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Just going back to your Capital Markets Day last May, you talked about 17 to 20 long-haul, ASKs up 2% to 3%, that's gone up to around 4% in '18. You talked about (inaudible) fuel at least down 1.5%, obviously you're now flagging 1% to 1.5%. I was just wondering why so cautious? Is there anything in particular that happened? Is it staff cost, pilot cost, is it any other line items you would flag?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [29]

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I think that what characterize the group is a unit cost reduction between minus 1.5% total already 4 years. So we want to continue on that path. As you know also even if we increase a bit more capacity in 2018 compared to '17 there is also some inflationary effect here or there. Look at some wage evolution in some of our competitors. I also spoke about the pressure we have concerning the maintenance contract. So for today based on the budget we have built at the end of the year 2017 we are looking for a unit cost reduction between minus 1% and minus 1.5% for 2018.

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Operator [30]

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We'll take our next question from Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [31]

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Can I just build on what James was asking? On cost and labor cost pressures. How do you expect to manage the strike threats that we're seeing at Air France and indeed a full set of labor cost pressures, inflationary pressures at KLM as well and how easy will it be to negotiate the aircraft cap at Transavia in this environment?

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [32]

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For Air France we have signed an agreement for a general increase of 1% which is a first time since 2011 with 2 unions. And the Air France management is going to receive the unions that have asked for a strike next Monday to -- with the clear results of 2017 and our perspective to be able to explain better than we could do before the result, what's the situation of the company. For KLM, the CLA is in negotiation and there are still negotiations. So I mean we have to pursue our policy of discussion and negotiation with the unions while keeping our strong stance and will to contain our cost, it's what we are going to keep on doing these next weeks and months. Okay. I think we have finished with the question from the phone so we can go to the question within the room. Thanks.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [33]

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Neil Glynn from Credit Suisse. If I could ask 2 questions on 2 competitive facets to 2018. Firstly with the TGV, you're cutting domestic capacity by 2% in 2018. Have you bigger plans to combat the threat and should we expect capacity domestically to continue to reduce to protect pricing? And on the Norwegian side you have obviously mentioned a new fares on the Transatlantic. We're seeing quite a lot of growth on the Transatlantic driven by Norwegian this summer. Would you expect pricing on competing routes to decline or can you avoid that somehow?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [34]

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Concerning the domestic. We are expecting the effect of the high-speed train of course. We have already anticipated by reducing the capacity mainly to Bordeaux already in 2017. And we just continue to adjusted our capacity due to this quite strong competitor, to be honest, concerning the west part of the country as there is a high-speed train to Bordeaux but also to Wuhan which is impacting (inaudible) as destination. So clearly this is a competition. We have nothing to discuss exactly the profitability of the competitor, this is another story, there is a report which is published now about (inaudible) but clearly we don't see strong capability to grow and minus 2% is for the next step of already a long strategy consisting to rationalize the domestic market. Concerning the competition of long-haul low-cost carrier...

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [35]

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For the [SNTF] competition, I think that we came to an end to the TGV program because of the lack of fund from the government to sponsor the construction of TGV line. So I think it's clear that the landscape of the TGV lines is still for a certain number of years so we reached the peak of the competition from TGV and we are adapting our program network to this competition. For the long-haul, we have always said the same thing. We are quite cautious and aware. In front of the long-haul low cost we don't want to make the mistake made in the past before the arrival of the European long-haul. We are not that sure of the business, sustainability of this business model, I think some results show it's not that easy. And we are adapting tactical answers like branded fares. We are going to, with Delta put together on the market beginning of April in order to prove to the consumers that we can have as attractive offers as these competitors. But of course it means more offer. But the demand is going to be created by this new offer and parties going to be taken on other competitors. But there are many other competitors on this route and then our offer. And we do think that with Delta we have the power because of our presence in Europe, in the states to be one of the competitors that are going to suffer less from this new offer.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [36]

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Danny Roeska from Bernstein. Maybe a short question around the short-haul environment in Europe. You are less exposed to short-haul but still how do you think about consolidation in short-haul as you talked about long-haul consolidation? What opportunities do you see in Europe? What are you thinking about? And maybe in relation to that also how do you see your short-haul fleet developing? We've talked about this before, you said previously you may be thinking about a fleet program towards the end of '18 on medium-haul, is that still the case? What would you be looking at, kind of how does Transavia and fleet renewal fit into that? So maybe a comment on short-haul picture in Europe, consolidation and your fleet plans on that.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [37]

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I can answer the fleet, what is the situation to Air France medium-haul fleet. Think it's relatively clear. We have all the two Transavias in 737, in KLM 737, Air France with 320. The fleet in KLM is a bit younger than the fleet into Air France. So which means that the replacement will come a bit later. But we need additional aircrafts for Transavia 737. So concerning the fleet of Air France, replacement has to occur progressively, it is not urgent but after 2022 it will be necessary to open the phasing of some new aircraft. So that's why we have announced to the market that we will organize [ISP] by the end of the year. The ISP will be focused on some 737 for the needs of Transavia, 320 for the needs of Air France. We will also ask [Oman Air] to see what kind of offer they can make to us and also we will have to look at Bombardier to see after the deal with Airbus, what does that mean for the future. So we will calculate how many aircrafts we need, can we move from one to another one and to split bit more regional versus according to the conditions offered by the suppliers and then we will make all calculation to make an order. Do not expect a big order, we can make that step by step, but it is clearly the first time we come back to as a medium-haul suppliers aircraft in order to prepare the need for the future. So I will say it's just ongoing business but there is a step for the fleet managers, mainly in Air France and in Transavia in order to prepare the future. Consideration, first consideration in long-haul. We speak quite often about the topic but we are contributing too. Do not forget that last year with Virgin deal we are entering the U.K. market, we are creating a new link between the second company out of (inaudible) for the North Atlantic. So are seeing part of this consolidation process. In 2017 also you have seen there is a problem in Monarch, a step made by Air Berlin not a step but (inaudible) activity of Air Berlin and there is course as you know Alitalia. And as we have always explained for Alitalia we cannot be totally disinterested but the future of Alitalia which is a partner of Air France-KLM, a partner of Delta and Air France-KLM on North Atlantic JV. So we have to look what is happening with Alitalia. It doesn't imply that we will take an equity in Alitalia, but I think that to look what is happening and again I think the best expression is we cannot be totally disinterested by the future of Alitalia. So and for the rest in '17 we made the step with Virgin. We will see in the future, but we cannot make a deal every 2 months.

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Yan Derocles, ODDO BHF Corporate & Markets, Research Division - Analyst [38]

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Yan Derocles from Oddo. I wanted to ask you a little bit about the aerospace consolidation among the aircraft manufacturer and because you've seen the Airbus-Bombardier deal, (inaudible) Boeing, but even on the supplier side with UTC and Air France. So would you anticipate this situation being a problem for you in terms of how you will manage your fleet cost over the next few years?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [39]

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Frankly we are moving from (inaudible) situation to a (inaudible) situation. So the world is not really changing. We have extremely limited numbers of suppliers. For the regional there is only 2 more or less, Mitsubishi we will see in the future, but for the time being the program is a bit delayed. Concerning the Chinese project, it will come one day of course but for the time being it is not yet available for the airlines. So today we have 2 suppliers, clearly the two regionals are outspoken or outspeaking with Airbus and Boeing. And as you know there has been this deal between Airbus and Bombardier and the discussion between Boeing and Bombardier, that change releases the situations I am not so sure. The main problem for the Boeing and Airbus if they move to this type of deals will be how they will integrate the regional aircraft in the range or in the offer. Big question for us for example is, is Airbus considering a cockpit combinability between the Bombardier aircraft and the 320 family. If not for us it will remain 2 separate families in terms of cockpit and in terms of maintenance. So clearly for me and for the fleet managers of the group what is important is what is happening in terms of combinability between the original aircraft and the medium-haul aircraft if there is this type of configuration developing in the future. In the years after of course we have look what will happen with Mitsubishi, and the Chinese project are there to be considered as we are new competitors putting more pressure on the market among the aircraft suppliers or the aircraft manufactures or -- but concerning Mitsubishi and the Chinese probably it is not a question for the next 5 years.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [40]

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Michael Kuhn, Societe Generale, 2 from my side. Firstly on unit revenues, they were flat January, you're guiding positive for the first quarter. With Chinese New Year effect in January, Easter effect positive for the first quarter if you would try to remove all those effects would you still say there is a positive underlying trend also going into the second quarter? And then one technical question on profit sharing, just assuming profit would remain stable this year would the profit sharing component remain the same or is there some kind of dynamization or growth incentive component included?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [41]

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Okay. Concerning the unit revenue, we have not the calculation if you exclude everything but I will just answer concerning January compared to what we said for the Q1 in January, I said that during the presentation the unit revenue is positive on long-hauls, positive in medium-haul and just negative in domestic. So you can judge that differently if it was negative everywhere. So again it is mainly the effect of the domestic which makes the unit revenue flat in January, but again in January the unit revenue was increasing in long-haul and in medium-haul. So based on that and the bookings we are observing now and we have accumulated we are, if you listen to the specialist of the yield management, of the revenue management of the group, they're considering that the unit revenue will be positive in Q1. After that, as you know, it is extremely difficult to make forecast beyond that period, quite difficult because the bookings you have in your system for the summer are still relatively low and you cannot draw to precise conclusion. My only point is to say that based on what we see today there is demand, so demand seems to be there, at least it's true for the first quarter. Concerning your second question, no, the system which are today in both company is operating is the same next year, they will distribute the same amount of money as profit sharing to some players. There is no escalation, no, I don't what or any other mechanisms making the profit sharing more expensive next year at the same level of (inaudible) results.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [42]

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But not cheaper either, so there is no incentive to improve our profitability.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [43]

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It's not cheaper, no.

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Unidentified Analyst, [44]

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Can I have another one on the (inaudible) because you mentioned this point during your presentation. Can you elaborate further on this one, what's your -- what are your expectations in terms of taxes, productivity, your competitiveness?

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [45]

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I think that we don't, we are not asking any help from the French authorities, we are just asking them to give, to the French airline companies and not only Air France but also the other one, level playing field. And for the moment when you compare the taxes on the air transportation or the social charges that we have it's quite substantially higher than the ones of our competitors and not going to take places but compared to Germany, Netherlands, Great Britain and so on. And particularly of our industry and specially of Air France is the fact that we are -- we have 60% of our revenues on the competition and from outside France for Air France and that 97% of our employees French contract. So we are quite sensible to this environment. And so together with our colleagues we are asking to the French authorities to lower the level of these charges that are far heavier than the one of our competitors, European competitors. So for the moment it's too early to know what we can get, but it's going to be the dynamic of the access that will be very important to get positive result for us.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [46]

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Second one from me, Daniel from Bernstein again. Maybe on the sector outlook a little bit, fuel price we're all breathing a sigh of relief that it's kind of trending downwards again. If fuel prices were to remain high what do you think how long would it take the sector in Europe to kind of react in terms of capacity growth, when would you expect that to see and how quick would you think about changing your capacity growth profile if fuel prices really stayed at an elevated level around $70?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [47]

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First, there is answer given by somebody in (inaudible) Air, the CFO, I think indicating that when the fuel is high you need 12 months before to be able to transfer part of it to the clients. It's more complex. I think that in fact it is both a question of what is (inaudible) between demand and supply and after that what is the internal pressure from the CFO to explain to the yield management managers when the fuel is high you have to increase the price. So there is a balance. Clearly it can take time, but it is not a perfect correlation of course between the fares and the fuel price. But probably -- but can be transferred, but of course not totally because the main determination of the unit revenue is coming from the supply and of the balance. Concerning the adjustment of capacity, I think we can do that quite rapidly if we consider that the route is not profitable because the fuel price is eloping too high, you reduce capacity like we said relatively rapidly. So the adjustment of capacity is not a problem, you can do it quick. If the volume is more again what will be the situation, if the fuel price is high and if there is a being excess or large excess of supply compared to the demand, so difficult to answer in one word about concerning your question.

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Jean-Marc Janaillac, Air France-KLM SA - Chairman, CEO and Chairman of Air France [48]

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Okay. And that was the last question. So thank you very much for your presence and your questions. Thank you.