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Edited Transcript of AF.PA earnings conference call or presentation 31-Jul-19 7:30am GMT

Q2 2019 Air France KLM SA Earnings Call

Roissy Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Air France KLM SA earnings conference call or presentation Wednesday, July 31, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin M. Smith

Air France-KLM SA - CEO & Director

* Frédéric N. P. P. Gagey

Air France-KLM SA - CFO

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Conference Call Participants

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* 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

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Jarrod Castle

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

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* 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

* Savanthi Nipunika Syth

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

* Stephen Furlong

Davy, Research Division - Transport and Logistics Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the HY 2019 Air France-KLM Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Ben Smith, CEO, Air France-KLM; and Mr. Frédéric Gagey, CFO, Air France-KLM. Please go ahead.

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [2]

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Good morning, ladies and gentlemen. I am here today with Frédéric Gagey, and we are very pleased to welcome you to this presentation of Air France-KLM's 2019 first half results. Firstly, thank you for joining the call and for your flexibility on the change in schedule. I'm going to share with you a number of strategic decisions contributing to the simplification and modernization of our fleet.

First, a few comments about our group's activity in the second quarter of 2019. So within a challenging environment, owing to the current geopolitical tensions and economic uncertainties, Air France-KLM posted a robust second quarter with a 5.1% increase in passenger numbers and a 0.9% improvement (sic - see slide 2, "0.8%") in passenger unit revenue. The group increased its operating results, reflecting continued execution in unit cost reduction, which enabled us to more than offset rising fuel costs.

In line with the net debt over EBITDA target of below 1.5, the group further strengthened its financial position. The group reduced its net debt by EUR 466 million compared to the end of 2018. After the strategic update, I will hand over to Frédéric Gagey, to take you through the detailed presentation of the second quarter results.

Moving on to the Air France medium-haul fleet with its Airbus A320 family aircraft. We are currently operating Airbus A320s, Airbus A319s, Airbus A318s and the larger Airbus A321s. This medium-haul fleet is aging and a portion is due for replacement in the coming years.

I'm pleased to announce that to begin renewal of the medium-haul fleet, Air France has placed a firm order for 60 Airbus A220-300 aircraft, with an additional 30 options and 30 purchase rights. The Airbus A220 is the ideal aircraft for the Air France short- and medium-haul fleets for several reasons: one, it's an environmentally friendly aircraft with 20% fewer CO2 emissions and a 50% reduction (sic - see slide 2, "36%") in noise. It's also economically and operationally efficient with low aircraft and trip cost; two, it is the right-sized aircraft; three, it is a perfect fit for the product proposition we are currently developing.

I'll start with the first point, cost. Airbus A220s have a significantly lower capital cost in comparison to other next-generation aircraft of comparable size. Together with Frédéric and our strategy, fleet and network departments, we have carried out an in-depth review of financial scenarios for the fleet. Compared to other aircraft types, the Airbus A220 scenario will result in significant CapEx savings.

In addition, the Airbus A200 has a lower trip cost compared to the current A320 family, mainly thanks to its fuel efficiency. Compared to the existing fleet, it will thus generate an EBITDA improvement.

Finally, if necessary, the terms of the agreement with Airbus, give us the flexibility to postpone deliveries of firm orders. In addition, the 30 options plus 30 purchase rights for additional deliveries to replace the remainder of the old-generation aircraft in the medium-haul fleet provided even more flexibility going forward.

Another important factor on cost is the fact that the engines on the Airbus A220, the Pratt & Whitney geared turbofans, provide the most fuel-efficient engine technology. The fuel burn per seat of an Airbus A220 aircraft is 20% lower than previous generation aircraft and the fuel burn per seat is even below the A319 NEO. Combined with the lower capital cost, the fuel efficiency will deliver lower trip costs, lower than the existing Air France fleet and other comparable aircraft.

The Airbus A220 scores very well on environmental factors and is the quietest and cleanest jet aircraft of its size. These environmentally friendly aspects are due to the efficient design of the aircraft with advanced materials used in more than 50% of the primary structure, meaning both lower weight and required maintenance costs. It is a truly next-generation aircraft.

Concerning its size, with 150 seats, the Airbus A220-300 is optimal to replace our Air France's current A318 and A319 fleet. The range of the aircraft allows it to operate all the current routes in the Air France medium-haul network.

With its unique and top-of-its-class characteristics in terms of customer comfort, the Airbus A220 is a perfect fit for the product Air France offers its customers in terms of cabin layout. The most noticeable feature our customers will notice is the seats. They are the widest in any single-aisle aircraft currently on the market, given the 5-abreast seating configuration, while the large stowage bins allow one roller bag for every passenger.

We are all very pleased this aircraft will join the Air France fleet in the coming years, and we strongly believe that the Airbus A220 is going to be a key factor in making the Air France short- and medium-haul network profitable as well as enhancing our value proposition to our customers.

During the 2018 annual results call, I mentioned the early phaseout of 3 Airbus A380 aircraft whose leases were expiring and that we would be reviewing the remaining 7 A380 aircraft.

As you will have heard, not only from us but also from many of the A380 operators globally, the profitable deployment of the Airbus A380 aircraft is limited due to the high cost of operations in addition to the challenges faced in terms of operational performance. Airbus has announced a suspension in aircraft production, and we see other operators reducing their A380 fleet as well.

As for the 7 remaining aircraft at Air France, a fleet of this number of aircraft is suboptimal as it will require a minimum of 1 spare for 6 operational aircraft. It would also be faced with a major cabin refurbishment program for these A380 aircraft to upgrade their product offer, each costing upwards of EUR 35 million in addition to required maintenance costs, meaning an investment totaling EUR 85 million per aircraft would be required. Therefore, an early phaseout of the Air France A380 fleet will result in substantial CapEx savings estimated at EUR 400 million. Well, it does come as no surprise that we have decided on the early phaseout of the A380 aircraft.

Financially speaking, there will be some one-off costs, and we will also be accelerating the depreciation of the aircraft. The total amount is estimated at around EUR 400 million and will be spread over the 2019 to 2022 period. New generation aircraft will replace the A380, and several types are still under consideration. Negotiations with the manufacturers are in advanced stages, and we will keep the market informed in due course.

We can, however, disclose that we will require no more than 9 new wide-body aircraft to replace the A380 fleet. The early phaseout of the A380 aircraft will have a profitability uplift starting from 2022 and will generate positive equity over time.

We announced at the end of June 2019, another important step to simplify and rationalize the fleet of the -- group fleet. Air France and KLM will swap the remaining firm Boeing 787 and Airbus A350 orders between them, in order to realize fleet efficiencies through harmonization of similar aircraft at both airlines. The implementation of the swap between the airlines means that in the 2021 to 2023 time frame the 6 remaining Boeing 787 ordered for Air France will be transferred to KLM; and the current 7 Airbus A350-900s on order for KLM will be transferred to Air France.

KLM presently operates 13 Boeing 787-9s and received its first Boeing 787-10 in July 2019. This fleet will further grow to a total of 21 Boeing 787s by the end of 2020 to which will be added the 6 Boeing 787s, initially intended for Air France for a total of 27 aircraft.

With regards to the medium-haul fleet of KLM, we have announced in June, our intention to purchase up to 35 Embraer E195-E2 jets with 15 firm orders and purchase rights for a further 20 aircraft of the same model for KLM Cityhopper. In order to enhance its existing network and to permit the efficient development of new routes, the Embraer 195-E2, will be a welcome addition to the KLM Fleet, giving greater capacity flexibility and help to manage down costs. In addition, the environmentally friendly E195-E2 also supports our sustainability goals with lower levels of noise and emission.

Now I will hand over to Frédéric for the financial presentation.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [3]

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Thank you, Ben, and good morning to everybody. I hope now you go to Slide #12 concerning the financial results of the second quarter. As indicated by Ben at the beginning of the presentation, we can consider that the second quarter is solid in the sense that you see a strong development of the activity: an operating result of EUR 400 million, a margin of 5.7% and a relatively significant reduction in the net debt. So all in all, it is a result which is satisfactory.

Of course, when you look to the evolution compared to last year, which is a slight improvement of operating result, you have materially to take into account the fact that last year's second quarter, in Air France, mainly was impacted by the strike with a global effect, which has been estimated to EUR 260 million at the EBIT level. But by themselves, this result for the second quarter achieved margin growth to 6%. I think it can be considered relatively satisfactory.

You also see that the ROCE of a 12-month sliding is at 9.3%, which is also a result which is acceptable. And as indicated by Ben, the ratio adjusted net debt on EBITDA is below 1.5x, exactly 1.4x for the 12 months' period, finishing June 2019.

I go -- move to the Slide 13, where you have the evolution of the [result] activity. Network, including cargo: we have a good development of capacity in the passenger activity, plus 3.9%; positive unit revenue, plus 0.9% for the passenger activity. And I will come back later on the development of the unit revenue per network.

Cargo, there we have a more negative signal. One is mainly the unit revenue is down minus 7.5%. It is a relatively important decrease but clearly related to all the problems today in the world exchanges are due to the commercial war between U.S. and China and some economic -- or macroeconomic negative evolution in some part of the world. So clearly, it was not the type of number we had seen in 2017.

We don't know yet what will be the trend in the next quarter, but clearly, this minus 7.5% of unit revenue for the cargo is not a good signal.

Transavia is developing well. Again, we have increased capacity for the combined Transavia Holland in Transavia France by 9.2% in spite of this relatively aggressive growth. Unit revenue is also developing positively, plus 1.3%. And the margin is quite high, 10.4%, a bit decreasing compared to last year but still a very good margin, which is partly explained by the fact that we are entering the touristic period and also by the shift of Easter during the second quarter compared to last year.

Maintenance is increasing the margin at 4.9%, and the revenue is increasing significantly at plus 12%, so we are back to an improvement of the margin of an amount after -- a bit more difficult here in 2018. We had already such an evolution during the first quarter of this year. So all in all, for the group, a margin of 5.7%, increasing compared to last year. But again, I will come on that a bit later on, partly explained, of course, by the strike effect in Air France for the year 2018.

So I go to the next slide, which is a split of the unit revenue compared to the last year. So we have given to you a unit revenue during the second quarter, during the 6 months, per network to indicate 2 things. First, during the presentation of Q1, we have indicated that the unit revenue globally will be slightly positive, with a good long-haul and a negative short-haul due partly to the base effect of last year after the strike of the railways company in France.

I am happy to see that we have been relatively precise and accurate, you see that the long-haul unit revenue for the quarter is, in fact, relatively dynamic, plus 2.3%, with a positive number everywhere.

But in Latin America, where the difficulty is mainly in Brazil, Argentina, you see a drop of the unit revenue by 10%. And concerning the medium-haul point-to-point is negative, minus 9%. Medium-haul hubs is neutral at plus 0.2%. So let us just say that we have been, in fact, relatively precise when we have given the future or expected trend in terms of unit revenue.

One remark, however, if you look at the results for the 6 months, so the Half 1 2019, you see that the development in the long haul, is a bit less dynamic than what you see during the second quarter. So [just] to say that the second quarter is an [exception]; and that when you are looking at the 6 months it's something which is a bit more neutral or shy in terms of evolution of the unit revenue long-haul, which is, I'll just say, slightly positive at plus 0.8%, and again, negative in Latin America and positive in all the subnetworks.

If I go to the next slide, which is the split of the capacity. So clearly, evolution of the unit revenue has just been commented. You can also make quick calculation to show that mainly in long-haul, [were], generally speaking, was an increasing load factor but also an increasing yield. So it is not only the load-factor evolution, which is explaining the unit revenue trend; it is both the load factor and the yield [paid] by the passengers. And also to keep in mind that the ancillary revenues are still quite dynamic, plus 20% compared to last year, supported by the branded fare and the new distribution capability system we have put in place already 2 years ago. And note also that the premium segment is relatively resilient. During the second quarter of 2019, we have unit revenue, which is up [1.5%].

Unit cost. Unit cost is relatively good in terms of posted number, so reported change is plus 1%. When you correct for the currency effect and the fuel price effect, we are at constant currency and fuel unit cost decreasing by 2.3%, which is a result of a good level of productivity. Labor productivity is improving by 3.1%. Also the fact, which is going into the negative direction, you have to take into account the effect of the 2 wage agreements which have been signed both in Air France and KLM last year and which are clearly influencing the evolution of the staff cost.

Also, keep in mind that in Air France, following an external consultation study, which has been managed during the second quarter, there will be a new plan on cost evolution, simplification, efficiency of processes, which [will be] launched [back] in September. Also, the fact that last year was impacted by the strike, played a role in terms of unit cost. We had last year, as you know, quite high customer compensation costs, which are, of course, and happily decreasing in the year of 2019.

I move to Slide 17. In the first quarter presentation, we show you the evolution of the operational performance improvement of Air France. You know that it is one of the priorities given by bank to the management of Air France Group. And let's just say that the results for the second quarter are acceptable. You'll see that in terms of on-time performance, Air France is ranked 16 in June; 12th in May; and 14th in April, which is not too bad. And if you look more precisely, amongst the European legacy carriers, Air France is at the top in terms of time performance, #3 in May and in June.

On the right of the slide, you see the evolution of the Net Promoter Score. Also, in Air France and KLM, the trend in Air France is positive, coming from 12 last year; and 19, 2017; and now being at 24 in Q1; 25 in Q2. There is still a gap compared to KLM. But for Air France, trend of evolution versus Net Promoter Score is positive.

I go to Page 18, which is speaking by itself, evolution of the EBIT between Q2 2018, Q2 2019. Clearly, a positive contribution of the unit cost estimated to plus EUR 135 million; a negative effect of the fuel price ex-currency, which is mainly explained, of course, by the hedging delta result, if you compare 2018 to 2019. I will come back on that a bit later on.

So in fact, the fuel prices are declining in 2019 compared to last year. It was a positive impact of EUR 78 million, but also, this effect is more than compensated by the fact that the hedging is less positive in '19 compared to '18, even if, it is still positive. During the second quarter 2019, the currency impact is almost at full, slightly negative, minus EUR 18 million. It's positive on revenue, negative on fuel and on growth. And when we sum up the 3 elements, we have minus EUR 18 million as a total.

Next slide gives a split of the group profitability between Air France and KLM, what can we see is, if I take the top of the slide, when you look at the second quarter, Air France is improving but by plus EUR 130 million compared to last year. But as you, of course, know, we have to take into consideration the strike effect, KLM, which is more like-for-like because I believe that were no strike in KLM last year. You'll see that the change is negative, minus EUR 70 million, and a reduction of the operating margin by 2.8, even if, of course, the operating margin is still at a quite high level of 8.9%.

The result, when you look at the first half, are comparable in terms of trends to what we see on the second quarter. The reduction of the margin in KLM is minus 3.7, and the margin is up 3.8%, taking, of course, into account the first quarter, which traditionally is with lower margin and Air France as -- over the 6 months, given a negative operating margin, even if, it is improving compared to last year by 0.8 in terms of the margin.

So net debt, a good evolution of the net debt, relatively high level in terms of free cash, adjusted operating free cash, which is calculated excluding the IFRS. We use [all methodology] to calculate the adjusted operating free cash, as many other companies are doing, it's positive at EUR 351 million, which is higher than last year, where it was at a plus 1 for Q1.

And in terms of evolution of the net debt, including IFRS 16 calculation on this methodology, it was at the end of the last year at EUR 6.2 billion, and it is at the end of the second quarter at EUR 5.7 billion so a significant decrease of the net debt, which follows the net debt-on-EBITDA ratio to stand at 1.4 so being below 1.5.

Let us speak now about the outlook, first, outlook on the revenue. I am on Slide 22. As usual, we presently use a long-haul forward booking load factor for the period August-December. First remark in July, the load factor which will be published soon is equivalent to last year, but no improvement in terms of load factor.

But as you know, in the summer period, the load factor was traditionally, extremely high. For August 2019, we have, for the time being, managed [one] in terms of long-haul forward booking load factor, but we are [closed], of course, to the [real] one. September, plus 1, so which means that when you see that all together, we expect for the second quarter unit revenue, which is expected to be flat compared to last year, so something a bit less optimistic compared to the result I showed you before concerning the second quarter.

For the last part of the year the long-haul booking load factor are very high compared to last year, plus 3 in October, plus 2 in November, plus 3 in December. A bit difficult to say how it will translate in terms of unit revenue because the period, of course, is a bit farther, but let us say that it is rather a good signal, but don't be too optimistic for the time being. We have to go a bit closer to the period before to draw any conclusion.

If I move to the next slide, concerning the fuel bill, nothing new. We are still at plus EUR 550 million compared to last year, which is close to the number we gave at the end of the first quarter. As indicated in the slide, if you look at the last line in the figures, just to remind you that the hedge result last year was $800 million. For 2019, we expect the current forward curve to have hedging result close to 0. In fact, $50 million. And as explained before, a large part of the increase of the fuel bill year-over-year is explained by the fact that the hedging is less positive in '19 compared to '18.

Page 24, the guidance for the full year, not many changes compared to what we indicated during the first quarter presentation. One exception is the capacity in Transavia expected in the previous guidance between plus 9% and plus 11% and now expected between plus 7% to plus 9%. The fuel bill will be decreasing compared to the last guidance, where we indicated an increase compared to 2018 of plus EUR 650 million and now plus EUR 550 million only so a reduction of EUR 100 million. Currency effect still estimated to be neutral. Unit cost still estimated to be minus 1% to 0, but as I told already, we think that we will be -- by the end of the year, rather in the good part of the indicated range.

CapEx, EUR 3.2 billion, given in Q1, EUR 3.2 billion confident today, and net debt-on-EBITDA ratio below 1.5x as indicated also during the Q1 presentation.

So I have finished the presentation, and with Ben and all the team, we have today Erik, the CFO of KLM; Steven, the CFO of Air France; and Marie-Agnès, of course, the Queen of Financial Communications.

So I open the line for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We would now take our first question. This comes from Jarrod Castle from UBS.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [2]

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And 3, if I may. Just firstly, on RASK, it seems like there's a positive mix towards leisure rather than premium. So any comments, if this is more a concerted effort? Or if there's any softening in business mix.

Secondly, just kind of related, some good performance on the North Atlantic. But can you give some color in terms of what you're seeing in July and August? And whether or not, there's a relative weakening compared to Q2?

And then lastly, balance sheet, you continue to bring down the net debt to EBITDA. Just some color on where do you stand on potentially getting towards investment-grade rating and the criteria behind that?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [3]

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I take the last one first. We had some discussion to -- some 6 months ago with bankers and with credit analyst. And to be transparent, they considered that when you have an adjusted debt on EBITDA close or below 1.5x, they consider that you are not too far from investment grade. So [acceptable], but 1.5x, I'm saying, which is very acceptable for bankers in terms of investment grade.

Concerning the evolution of the premium and economy, I have to say that during the second quarter, the premium is not too bad. You have seen the number. If you come back to slide -- to the Slide 15, you see that the premium RASK is at plus 1.8% and the premium economy is at plus 0.7%. And when you speak with salespeople concerning development of the demand for the global contract we have [with the same.] For the time being, there is no specific color that the situation will be deteriorating.

Of course, when you look sector by sector, you can have some change -- let me check but the [stock] [performance is] a bit better, automotive is a bit more negative. But all in all, the development of the demand and the turnover when you look at the global account compared to the economy, the global account last year, were significant in terms of development of sales.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [4]

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And then just North Atlantic. Any commentary around that, please?

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

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On the North Atlantic concerning the issue -- remember, the second quarter and what we expect from the third quarter, I would say that possibly the development of the RASK would be a bit weaker in the North Atlantic third quarter compared to what we had in the second, but it is still in the positive area.

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Operator [6]

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I will move on now to our next question. This comes from Stephen Furlong from Davy.

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [7]

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Well done on the fleet order. And I just had 2 questions, maybe for Ben. Where are we with Transavia? And if the [scope clause goes], how big do you think the Transavia fleet could be? Where will those aircraft be deployed or just broadly?

And the second question, and I appreciate the Investor Day call from November, what I'm just thinking in terms of Air France, obviously, knowing that has lower margins than many other airlines and indeed in KLM, where do you see is the biggest opportunity over the medium term for Air France and the biggest challenge? That'd be great.

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [8]

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Okay. Regarding Transavia France, where today, there is a scope limitation of 40 aircraft. We're at 30 aircraft today. There is a consultation vote -- referendum vote that the largest union representing the Air France pilots, it's currently out. The results of that vote should be known today. And if that vote is positive, we will then have this new opportunity to grow Transavia France.

Where we would look to grow Transavia France, would obviously be where we compete heavily in and out of France with the low-cost carriers. So these are the routes that we're looking for.

How fast will we grow Air France, the Transavia portion of Air France, would depend on how we balance out the other opportunities. But I think the first item for us is to at least have the flexibility to deploy Transavia wherever it makes sense. So this is -- we should know the results today. And hopefully, it's a positive. If it isn't, we have some other avenues to address this sector.

On the second question regarding Air France. I mean we are -- haven't just started today. We've been studying the entire team, management teams at Air France, have been studying how to reduce the gap in terms of operating performance, financial performance between Air France and the rest of its European peers.

I would say the #1 item that we're focusing on is simplicity. Air France is a very complex company. This in itself, will drive cost savings. And then, of course, with all of the negotiations that were agreed to over the last 9 months, they are enormous -- there's an enormous flexibility now to drive productivity gains, so we still have a lot of work to do, but these are 2 of the items I can share with you now.

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Operator [9]

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I will move on to our next question. This comes from Neil Glynn from Credit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [10]

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If I could ask 3 quick ones, please. The first one with respect to the long-haul forward booking strength that you've highlighted. Clearly, your guidance is that the third quarter unit revenues will be stable. And obviously, a bit early to talk about the fourth quarter, I'm sure. But to what extent are you booking earlier at lower prices? Or how do you explain the disconnect between those long-haul forward bookings and the guidance? Is it maybe just short-haul?

Second question. KLM margins peaked a couple of years ago, and they are coming down quite sharply, as we saw in the first half. How concerning is this at a time when you're using KLM as a benchmark and an aspiration for Air France employees to be more productive and more profitable?

And then the third question on 2020, the fuel bill is guided flat in euro terms, certainly into next year. Just interested in terms of squaring the math of that, does that actually imply that your capacity growth will be pretty flat into next year? Clearly, in dollar terms, your jet fuel price looks like it will be slightly up next year. So just interested in your capacity plans, if you could confirm them as an impact to that fuel calculation?

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

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First, concerning the relationship, which is long-haul forward booking load factor and unit revenue, I see that what we indicate is relatively consistent. You can see that for the third quarter, we have [flat issue], so that's the 3-month forward booking load factor. And as a consequence for the long-haul, we explained to you that probably the third quarter will be with a flattish unit revenue. I think that it is relatively [clairvoyant], I think.

Yes, so all I'm sensing in your question, all I see that we continue to apply a rule where we consider that flattish forward booking are a good indication also of a flattish unit revenue. What is true is that for the third quarter, it means that the evolution of unit revenue in the third quarter will be a bit less positive compared to what you have seen in the second quarter where, to be honest, the results are extremely good.

A part of the South America, you cannot say that the unit revenue in various networks is extremely positive, which was a very good result for us the second quarter.

For KLM, Ben, you want to indicate something?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [12]

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Yes. I mean the KLM performance, when you look at it relative to some of its peers, it is in line, so we are focused also on a simplification process there, which will help us get rid of the last 747s, help this swap that we recently decided to do between the 2 units. Air France and KLM will also help. That will bring us down to 2 cockpit types at KLM, so we fly the 787 and the 777 [and dual rating] in terms of our pilots, so that puts KLM in the unique efficient position. And we do have talks going on today, negotiations going on with some of the staff at KLM to ensure that the contracts remain productive. And so if you look at the performance of KLM relative to some of its major peers, it's relatively in line.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [13]

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Concerning your last part of the fuel bill in 2020, to be honest, if I make a reference to Page 23. This page is more to share with you first evolution of the market price for the Brent situation in terms of hedging. So take that more [as an] indication of the hedging situation and the market, rather than an indirect indication about the capacity concerning the year 2020. Yes, but we have not yet really found, of course, what would be the capacity development next year. To look at that space more as a source of info concerning the hedging and the fuel price.

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Operator [14]

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We'll move on now to our next question, which comes from Daniel Roeska from Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [15]

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Three for me as well, #1 on the fleet order, and I assume that the smaller aircraft fits with the strategy of the [dense] network. That's basically where we're taking the [3 18, 19] and there isn't a large change to the network strategy of deployments compared to the '18, '19. [So just started] thinking about [there is] the network strategy behind the 220.

You already commented on Transavia. But could you shed a little bit of light on how you're looking at the French non-Paris Metro kind of thinking about HOP! [the nodes] in the Air France product and the Transavia product. How do you envision to take kind of the non-Paris metros forward in your strategy?

And on unions to talk about Transavia, could you also elaborate a little bit on what you're finding or you're thinking about with the pilot contract at Air France and KLM. Are they in good shape? Do you think you're in a relevant range to your relevant competition maybe, especially how you think or what is there you would like to change on that contract on the pilots for KLM and Air France, when you consider short-haul production and competition?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [16]

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So I mean we're very, very excited about the Airbus 220, the 300 series that we've ordered. The amount of flexibility and the unit cost of that airplane will enable it to operate in any of our current medium and short-haul routes, either domestic France, Europe. And then if you look at the range, this airplane can also fly outside of Europe.

In today's Air France contract, the pilot contract, there are some restrictions on the [stage] length and where we can fly narrow-body aircraft. I think this is something that we would look to improve with the Air France pilots. The relationship today with the Air France pilots, I think is extremely positive. I've been here 10 months, but from what I understand from my colleagues, it's the best we've seen in over 40 years. It's extremely respectful, a lot of trust and an enormous amount of transparency, and I just see this increasing, I would perceive that this will only get better in the future.

On the KLM side, very engaged staff at KLM throughout the organization, not only with the pilots. It's always a public interest when it is time for negotiations. And this is expected, but we're confident that there will be a suitable resolution to the negotiations that are going on today at KLM.

In terms of optimizing the domestic network on our navette shuttle between Orly and some of the larger French stations as well as a potential expansion of Transavia, as well as the restructuring at HOP! This is a big exercise, a big study that is currently going on, obviously the result of the potential expansion of Transavia played a big role in this and how we optimize our position at Orly when it is slot controlled. We do have more than 50% of the slots and ensuring that we get maximum profitability, some from that situation is being studied on.

In terms of the point-to-point network that does not touch the Paris Metropol, here once we have a very good understanding of what is feasible in terms of restructuring HOP! and how we rationalize that fleet and how we view moving forward in a profitable way in the domestic area, what will be the impact -- further impact of the TGV; what will be the further impact of some future taxes that could be imposed on us, all play into how we're going to move forward on the strategy.

Making domestic France profitable is a huge, huge effort and something that we must address. But all these pieces are interlinked. So the A220 is a great tool. HOP! needs to be restructured. Our position at Orly is key and the future number of aircraft we can operate at Transavia all plays into how we will optimize the French market.

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Operator [17]

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We now move on to our next question. This comes from Savi Syth from Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [18]

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Just on the fleet reconfiguration and simplification, which includes this morning's announcement. I was wondering if you could talk about how we should think about the, kind of the cost benefit of just having a more simplified configuration and maybe the revenue benefits as well. If you plan on having more premium seats over the next few years as a result of these changes?

Second question for me, just wondering how we should think about CapEx over the next few years with this new fleet order?

And then lastly, the third question is, with Lat Am, which is weaker this quarter, a weaker trend this quarter. Do you expect that to -- I thought we were expecting it to bottom. Just wondering how we should think about it as we go forward, that's bottoming or in OIC or probably even going to see an improvement there?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [19]

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Okay. So I'll start out with the fleet question. And I'm assuming you're referring to Air France, just to get a clarification, or are you also asking about KLM as well?

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [20]

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Mostly Air France, but just in general, the movements on the fleet side?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [21]

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Okay. So the wide-body fleet at Air France is extremely complex today. We have, of course, Airbus A380s, we have 2 versions of the 777s, the 300ER, the 200ER, of which we have 7 different configurations. We have A340s, we will have the first A350 coming online in September. We have 787-9s, and we have A330-200s, so there's an enormous amount of work that has to go into simplifying this fleet.

Obviously, the decision to remove the A380 is a big one. This aircraft, as I mentioned earlier in my remarks, from a financial perspective, is becoming very difficult to maintain and produce adequate returns and the operational performance, it's the poorest performing aircraft we have from an operational perspective. And of course, the way we plan our bank structure here at Charles de Gaulle Airport, the amount of [flights] we need to [feed] this type of aircraft will be putting a lot of strain on the airport, so that's why this decision was made. It's the right decision for Air France.

On the 777 fleet, we are going through a reconfiguration to reduce the number of variants from 7 down to 3. And that should take place over the coming years, the A340s will be removed over the next 2 years from the fleet. And we will standardize the 350s, the 789s and the 330s around 1 configuration. The 350s and the 330s will be common type rated with our pilots, and we will be able to back up from an operational perspective, the 777.

So the operation, the operating performance of this fleet will obviously be much improved. The costs that currently incur in ensuring that we've got an on-time performance with a flight completion that is adequate with this type of complexity will be greatly improved as we go [through this] simplification.

When you look at the cost at Air France [we] ask you include managing this wide body complex fleet. I believe it puts us at a big disadvantage and adds definitely unnecessary costs, so this is a major part of our simplification process going forward. Obviously, we had to start with getting labor stability at Air France, which took a lot of effort on the part of the entire team at Air France, making some very, very tough decisions around what we would do with the A380s. And with the A380 decision having been made, how that impacts the rest of the fleet now puts that into a clear view.

And then, of course, making the decision on the A220, we're all very, very happy and pleased with that decision because of the flexibility and the performance of the airplane, and plus I think the fact that we will be ahead of all of our major competitors. It will be an extremely efficient airplane, I think it will really help the performance of Air France in the future.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [22]

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Concerning the CapEx.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [23]

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Follow-up on that.

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

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Sorry.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [25]

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Sorry, just kind of curious if that was more of a 2022 type of savings? Or we should start to see it even starting next year?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [26]

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I would say -- I mean we are already, in terms of how we deploy the current fleet, we are immediately reducing the number of configurations on the 777 down to 5, and within the next 9 months, we will have started an extensive program to reduce the types of configurations even further. We are isolating the types of airplanes on specific routes. We are looking to move the bulk of our A330s onto our Africa network, so a lot of efforts like that to reduce the spread and the impact of any disruptions we may have and the ability to back up the fleet, and that you can see started in less than a year.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [27]

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Concerning the CapEx, 2 or 3 remarks. First, the decision of plan, with 2 of the 380 is positive in terms of CapEx. First of all, we will avoid to make the cabin refurbishment, which was an extremely high CapEx estimated at EUR 30 million per aircraft. And second, due to the age of the fleet, we expect now to have the [engine show visit] and the Air France check to be extremely positive, which means that the question for us was, do we invest around EUR 85 million per aircraft to continue to operate them? Due to the current situation, the fact that Airbus have stopped production, it is not wise to stop the operation of the 380. So we do it progressively; the last one, with the phaseout in 2022.

But clearly, one element in the decision was the fact that for each of the aircraft to operate them longer, will ask an extremely high level of CapEx per aircraft. Of course, we will have to replace this aircraft. We have not yet planned anything. We'll come back to you later on when we have taken a decision. But first really, the decision was to save all the CapEx needed to maintain these aircraft in operation.

Continuing the 320 is also, of course, an investment. But first, keep in mind that the aircraft is cheap. Cheaper than, for example, the 320 or 320neo which is something, I think, quite important when you look at the level of investment, and as indicated by Ben, we expect also a return in terms of EBITDA relatively soon when we have introduced the aircraft into the main level fleet.

Last remark: as you know, at least it is a personal report highlight, of course, to speak about CapEx, but I really prefer after the adoption of IFRS 16 to look at the adjusted net debt on EBITDA. So as you know, you can play with CapEx and free cash by changing the percentage of the lease fleet, which means that thanks to IFRS 16, now we have a global referential to analyze the situation of the leverage, which means that I will [now for this] to register net debt on EBITDA that only by itself, at the CapEx level.

In any case, we will have, of course, to come back to you, concerning the future evolution of the leverage, and it is planned to do that, of course, for the Market Day in November.

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [28]

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And what I can tell you about South America, Air France has a long history of operating in South America. And what I just said recently with the -- all the various fleet types that we have, one of the advantages is we've got a lot of capacity, a lot of flexibility around the size of aircraft that we use. And we do operate into several cities in South America, more than daily service. So this gives us the flexibility to either up-gauge or reduce the number of seats to improve results. Obviously difficult to do that in the very short term. But as we plan out our 6-month, 12-month schedule, we'll -- do whatever we can to optimize around the new market conditions that we see there.

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Operator [29]

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We'll now move on to our next question. That comes from James Hollins from Exane BNP.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [30]

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Three for me, please. Just on the fleet renewals or the A380, in particular, if I was a betting man, I'd guess the A350 is the most obvious replacement for the 380. You seem, Ben, to make a very serious point about not ordering more than 9 of them, I'd say they were placing 7 500-seaters, where there are 300, if that were to be where it is, are you making any sort of indication with that statement that capacity planning within Air France, we should be thinking something around where we are this year, low single digits through kind of through the longer term?

Then a couple of regional ones. Just back on Lat Am. Actually, Brazil is certainly your largest market, nearly 30% of your capacity down there. I saw some comments from Iberia that maybe Brazil is starting to look a little bit better. Now clearly, double-digit RASK decline in Q2 would suggest it's not yet. I was wondering if you could make a comment on that.

And then on Asia, obviously, some pretty ugly terms from Lufthansa yesterday in China, you were clear to point out China is a bit tricky now. I want to sort of hone down on what you mean by that. I think it's 25%-ish of your capacity in Asia, but you did RASK up 3.9%. Is it really strong elsewhere or is China just starting to get a bit more funny or is China actually maybe not as bad as we think?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [31]

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Sure. Okay. So on the replacement capacity for our A380s. There are 3 aircraft that we're looking at, and I think we've already been public about that or some people have written about it and I'll just clarify, we are looking at additional 787-9s, we are looking at the A330-900neos, and we are looking at the A350-900s.

We are being very conservative on CapEx. There are several other ways for us to look at this. I think 9 aircraft will be the maximum that we would order to replace the A380s. There are other older airplanes that are not scheduled to leave the fleet at this time. Were the right offer -- if the right offer were to come in following on Airbus would we look to replace other aircraft? As I said, we are being very, very conservative on CapEx. But at the same time, with upcoming potential reconfiguration projects that we see in the coming medium term, would that make sense?

So we're very happy to be in this situation, where we have plenty of flexibility, and we have absolutely no, I would say no pressure on us to have to make a decision immediately. So that's on the A380 and all the choices that are out there are, I think, a definite improvement for us from an EBITDA perspective. And the fact that we already have -- we'll soon have 10 787-9s at Air France, and we have 28 A350s on order for Air France. It does put us in a position where we could order either one.

Also, with the KLM side of the business now focusing on the 777 and the 787, with additional 787 requirements at KLM we can leverage, continue to leverage the wide-body requirements of both airlines.

In terms of overall long-haul capacity, Air France has a very well diversified network that I think we can continue to optimize from an O&D perspective, particularly into and out of Paris, where if you look at the top 25 markets into and out of Paris, I think there are quite a few where we can perform better on an O&D basis so that we can -- I think it's important for us to really ensure that we optimize the mix of connecting and O&D customers here, so that's one of our exercises that we're going through. The A380 will obviously, the removal of the A380 will make that a little bit easier.

In terms of Brazil, yes, it is our biggest market in South America, we are seeing signs of improvement, and in fact we have 2 flights a day to Sao Paolo. We have -- sometimes for some part of the year, we do have more than daily service to Rio de Janeiro. We have our new service to Fortaleza and we do have some partnerships in South America which help us with feed, so we are well positioned in terms of how we can react.

As I mentioned earlier, we don't have our largest configured airplanes into Brazil, so we can't easily upgauge without changing anything. And we cannot easily down gauge as well, so we are watching it very closely and obviously planning for maximum scheduling for maximum profitability.

In terms of Asia, yes, it's somewhat tricky for us when we have one of the key routes, one of the key flights operated by an A380. One of our 2 flights to Shanghai is operated by an A380. And this in a challenging market to have to design and plan around this aircraft into that market, where the other 3 flights are operated by 777s. So the amount of connecting traffic we need in the 2 different revenue management strategies that have to go into place in a market that is extremely difficult, I think will become easier as we move forward. And does it make sense at this time for us to work out secondary markets with some of the smaller airplanes that we have and the more efficient airplanes that are coming into the fleet?

So yes, Asia has been a challenge, continues to be a challenge, but in particular, for the Air France side of the business within the group, the 380 does not help.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [32]

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So I'd just come back on that fleet normalization, or your views on fleet normalization because obviously, KLM's not flying any 380s. So replacing them, I guess, is a straight Air France decision. You're talking about the Boeing 787, which you just flipped to KLM. Is that actually a realistic Air France option given you're actually moving those out so you can and this is replacing the 380s in Air France?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [33]

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It most definitely, most definitely, with the requirement immediately for 9, 9 aircraft to replace the A380s; that is, to have a fleet of 19 787s is perfectly adequate. Eventually down the road, we will have to replace our A330-200s and the 787-9 is smaller than the 350-900 platform. So we'll have to evaluate whether having a greater number of airplanes and the efficiency that, that provides, if it [weighs] off what some of the options, the other options are.

And then, of course, the 787, there is the batch 10 which, as we progressively remove our older 777s in the future, the 200 series, the 200ERs, we do have 25 of those -- a 787 platform at Air France is definitely something that is an option.

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

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Concerning your 2 remarks on the market. Yes, we agree with [panagoulis]. In fact, when you look at the price in the systems today concerning South America, we see a very slight improvement, a very, very slight improvement. So for the time being, we can expect some improvement, mainly on Q4, but I think it will be something not impacting globally [as well we travel you], but we also see this positive signal concerning China as the same, but also -- the same, sorry, as your comment, in fact, we see that the development of the war, or commercial war with the U.S., evolution of the consumption in China, there is a bit of slowdown in the demand addressed in the Chinese market, so I will, we will dispose of your comment concerning specific markets.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [35]

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Is there any area where Asia is particularly strong?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [36]

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Sorry.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [37]

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Is there any area where Asia is particularly strong to offset that or was China weakness just starting?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [38]

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Yes. Look, we're quite pleased with our performance in Japan. We do serve 3 markets there, 2 cities and three airports. Our position in Tokyo is very strong with 3 daily flights. And obviously, with all that's going on in Tokyo over the next year. And the Air France brand, which is very, very strong in Japan. We are pleased with our performance there. We also have a strong presence with KLM, in Japan. So from a group perspective, I believe that we can continue on that and strengthen that position. If you look at the big markets, we're focusing a little bit more on Air France today, Japan is up there. When you look at the United States, you look at Canada, you look at Brazil, you look at Japan, these are the big markets, where Air France is in excellent position.

And I think we can continue to exploit the brand as we have a stronger -- let's put it, a stronger product offering that is dependable and better understood. I can share some positive news with -- with the people on the call today and those around the room. I've just gotten word -- just got a text here that the vote has been ratified. 78% of the pilots who voted on the Transavia file have moved forward, so we do now have full flexibility with the Transavia budget and the Transavia brand here in France, so very positive news there. We're actually all smiling in the room here.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [39]

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You cannot tell us what number of planes you're [going to] now?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [40]

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You have to give us a few minutes to digest.

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Operator [41]

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We now move on to our next question. This comes from Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [42]

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Congratulations on that vote. Can you talk a little bit about the French environmental tax and how you see that developing politically and otherwise, how we should think about that impacting unit revenues next year when it comes in, and then could you talk a little bit about the dynamics of the Board between the French and the Dutch political representatives? I think at the time of the investment they spoke about putting together a working group to advise on strategy. Have they given you any advice that they're going to? Or are you just going to work with the Board directly? And then just finally, can you update us on what the status is of the partnerships that are operating -- the JV with our new rate of investment into Virgin?

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

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So I can begin with the JV with Air Europa and the JV with Delta and Virgin. Those things are, I would say, going on. As expected, we are now discussing with Brazilian authorities concerning the JV with Air Europa. And we still expect the answer from the U.S. authorities on antitrust immunity for the tripartite JV in [4]. So there is nothing -- nothing strange except that it is a relatively heavy administrative process. Concerning the French and Dutch situation, there is no political representative [I met the Board of Air France in Cannes, it is an administrator]. Some of them are French, some of them are Dutch. [But I sense there is not political gain by itself at the Board of Cannes just a bit on that]. I'm just [in support of them] managing the business of the group, and this is most important, it was the most important task force [being through].

What we are understanding, and whatever is that the working group will not give any conclusion before summer, so this was a bit postponed, but I have no precise information on when it will be. Concerning the French environment tax, as usual, I can just repeat what we think here in the group. But I will say also in all the airlines, we are preferring to pay for the CORSIA system put in place by OACI concerning the fuel [in] the climate. We are involved in the ETS system put in place by Europe, which cost tens of million for the group and to I suppose any airlines in Europe. And now we have also to take into consideration the specific French tax, which is also impacting potentially the profitability of the group, so we do things that [with] systems in Europe and that we will see next year, what is the impact on the unit revenue for the French market. Are we able to compensate and to transfer the cost to the passengers or not.

But finally, if we want the system to be efficient, at least looking at the climate aspect, resolution is to transfer the cost of this tax to the passengers and to have the impact on the price. If it is just for airlines to absorb that would reduce their profitability [so it's still] in terms of the demand for air transportation, which means that the goal will be totally missed.

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Operator [44]

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We'll move on to our next question. This comes from Michael Kuhn from Societe Generale.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [45]

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A few remaining from my side. Firstly, you mentioned in the presentation that you are currently doing further studies about the efficiency efforts and potential further measures. Are further voluntary departure programs a potential option? And when would we know whether that is the case? Then secondly, you had a pretty high P&L tax burden, specifically in the second quarter. Was there a special reason? And is this of a recurring or a nonrecurring topic? And then last not least, you were able to further reduce net debt-to-EBITDA 1.4x. You mentioned you're close to investment-grade status now. What does that mean for your thoughts about shareholder returns and when we will we hear about that topic?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [46]

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So I can start with the first question on the restructuring and the transformation of Air France and what will be included in that. And so you've seen the first steps and I said, getting social stability was key, this Transavia lifting of the cap is a big, big positive for Air France and what [finding the 8 220 order into '20] was a big step, moving the A380 going through repeating what you all heard already, but in terms of what else are we working on, I mean the list is enormous.

As you know, Air France significantly underperforms in Europe, and our goal is to get it up to industry standards or even surpass that. Voluntary departure programs or partly voluntary departure programs, we actually are -- we do have many employees that are pushing us to put these in place. We are not quite ready to move forward with an additional voluntary departure plan, we already have one in place in the French provinces, but I would suspect that we would have the need to do it in the future, but what is positive is we do have quite a few employees that are looking for these. So I can't be specific today about when and where, but with the type of transformation and overhaul that we are just starting to do with Air France, this is something that we can share with you in the future.

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

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Yes. For the tax, you're right, that in Q2, there is a relatively high income tax into the P&L. If you go to the first quarter, you will see that it is the contrary. As a consequence, if you look at the half year result, you will see that we have an income tax which is totally normal, so it is more a technical issue, mainly at Air France, it was too low in Q1, too high in Q2, but it's [at free fall] for the 6 months.

And sorry, and concerning the 1.5x. Yes. I think that you know the 3 as a group, where with adjusted net on EBITDA, we show close to 6 or 7, some years, years ago, so which means that we have made a tremendous satisfaction, to come back to a normal situation. I think that now is the case. And my personal feeling is that, in fact, 1.5. I would say that 1.5x is an extremely satisfactory level. So -- and we [will still] that in November, as I said before, responding to somebody else, looking at the impact of the 220 plan in terms of CapEx and also looking to the effect of the 380 sales out. I think that best for [VAT] and to share with you a global trajectory of the group for the next year with some targets will be done in the market day in November.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [48]

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So that does mean that in November, you will also specifically inform us about your plans on future shareholder returns?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [49]

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We will share with you what we want to share with you, but at least, we heard that there is a strong demand from that point, specifically, and on some others also.

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Operator [50]

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We move on now to our next question. This comes from Damian Brewer from Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [51]

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Just three sort of housekeeping questions left, really. First of all, on Transavia, with the reduction in the full year growth, that kind of implies that H2 would do about 6% growth. But could you indicate that, what that is particularly biased in terms of when it comes to reduction to the fourth quarter? Or whether that is spread equally across the second half of the year. I'm just thinking if Q3 grows a similar 9% to 10%, put in place, Q4 is close to flat. So I just want to understand that.

Secondly, on the A220 order, particularly the sort of additional 30 plus 30, how much of that is contingent on what happens with the French Eco tax? And if it's too high or allocated in a bad way, would that indicate you'd look at sort of more capital reduction of the French domestic business? And then very finally, because no one's asked, on the MRO business, you're up 11% incremental margin running ahead of average margin, so profitability up there in the order book up again. Is there anything special going on there? Or is this just a continuation of the trend we should expect to see in future?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [52]

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Okay. So perhaps Frédéric can answer question 1 and question 3, and I'll go with 2. The first part of your question, and let me just clarify, I think we missed part of that because of the line here.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [53]

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On the one about the A220. Just want to understand how much of it's contingent on the additional orders and what happens with the French eco tax.

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [54]

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Okay. So yes, the A220, as you now heard, is 60 firm of the 300 series and 30 auctions, 30 purchase rights. So a couple of things here. Yes, the eco tax will play a part in how many of these options or purchase rights we take up, we're in no rush right now. We have a large fleet of existing Airbus narrow-body airplanes, some of them much newer than the ones we'll be exiting, so we have that flexibility. Were Airbus to introduce a larger version of the 220, that would of course play into how we replace the second half of the narrow body fleet.

Now that we have this positive result from the main union which represents the [sole] cost pilots, the ability to fly narrow-body aircraft on a much larger portion of our network will now come into place on how many of these airplanes that people order and where we will deploy them. And obviously, the -- what's -- how the train in France may be supported. And what changes we see there will come into play as well, so quite a few different, I'd say, different items here, whether they're in our control or outside of our control, will drive our decisions on that.

What I'd say is, these are not decisions we'll be making in the short-term on the second half of the fleet. I'd say a big one, and I don't want you -- I want to make sure that you don't underestimate it, is the fact that we can now fly narrow-body airplanes within the Air France Unit, just had to be where we could fly, prior to today, flying to South America, let's say, with the 320neo LR or 737-8 Max not possible under the Air France's current rules. Flying to Beirut with the narrow-body aircraft, not possible. Quite a few of the African destinations that are within a 7-hour flight range, not possible. So this opens up a whole new range of opportunities for us to more efficiently fly to some of these destinations.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [55]

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Concerning Transavia, if I understood correctly, your question it is where the -- or what would be the capacity evolution between now and the end of the year. So if you take where we are today for the first 6 months, with capacity and Transavia develop by 14%, it was a bit slightly below the [big jet]. But it's correct that for the second part of the 8 would be lower. I have the result for the full year capacity will be at 10%, which is minus 6% compared to the big jet so that is where we see this impact. For the second part of the year, which will be mainly consolidated on the Q4, so the Q3 is still quite dynamic in terms of growth, I speak mainly for the Air France, but it's mainly in Q4, that will have a reduction in capacity compared to 2018.

Concerning MRO, there is nothing special. What I just say is that we share now with control, the controlling of MRO as a concern to be sure that they are more and more focused on the margin of the new contract. There is now far better control than before concerning the [responding] control on the contract to be signed to be sure that in terms of margins as a lever, we expect that for the rest, nothing special except that, in fact, in Q1 and Q2, we are progressively improving the level of margin compared to last year.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [56]

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Okay. Could I just come back on Ben's response on the A220, just to be clear, what you're saying now is that Air France potentially has the capability not just to fly A220, but to look at other narrow-bodies, and therefore, a new market or better frequencies into certain markets than you had before? Or just a change in the way you address some of the sort of longer distance to sub-7 hour routes. Just to be clear on that?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [57]

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Yes. So the contracts currently in place at Air France between the corporation and the 3 pilot unions are, as you can imagine, quite restrictive, especially when it comes to certain fleet deployment capabilities. So in this Transavia, new deal or ratification, there were a number of commercial restrictions that were in place at Air France that had nothing to do with Transavia, a number of restrictions that were positive were also part of the deal.

And one of the most important was the removal of a -- what is a very strange term they use here. It's called a (foreign language). I'm not quite sure what the exact translation is, but it was an uneven circle around Paris, average of 3 hours, it's a 3-hour transition that would be the maximum that you could fly a narrow-body aircraft. That has been removed, so wherever the, a narrow-body aircraft could properly fly to, this now becomes a potential option for Air France. That, of course, changes the business case and the strategy of where we could fly these airplanes.

Now obviously, [that's] probably part of our analysis. So when we ordered the 220, we did not know whether this was going to be feasible. That's one of the reasons why we didn't -- why we ordered 60 and not 100, or not 120. So now for the second half of the replacement of the Air France fleet, it will be done under these new terms and new conditions.

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Operator [58]

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And we now move on to our final question, and this comes from Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [59]

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Two are left. One [is on] or the first one on the performance you had between Amsterdam and Paris. Is there any way very particularly to see I mean, the 0.2% or did you see it on those comps similarly, particularly if you adjust for the strike effect? And related to it, do you see any impact from the kind of overcapacity you see in the German market between Ryanair and Lufthansa, this does not affect you at all?

And yes, I have a final question is do you also -- I mean, looking that there's more discussions of maybe some airlines going bankrupt, do you look at also actively participating in some M&A if there's some interesting slots coming up? Or would you leave it all to your competitors and say, oh yes consolidation is good, but we stay on the [custom line].

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [60]

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So I mean, today, of our 3 major airport operations, where we have big operations. So we have, obviously, with Roissy Charles de Gaulle. We have Amsterdam. We also have Paris Orly Airport, so both Amsterdam and Orly are at capacity in terms of slots. So in terms of increased capacity, it can only come in the form of gauge. So the issues are, we don't expect any material change at least in the near term on the type of competition we will be facing at those two airports. Of course, Roissy still has capacity in the mid-day and later on in the afternoon whereas the morning is closed.

In terms of M&A consolidation, we have a lot of work on the Air France side of the business to ensure that we have a sustainable profitable future. That is priority #1, KLM, we have a model that works extremely well. That needs to be further optimized to ensure it drives industry standard or superior returns for the Air France model. That means a much bigger transformation as opposed to a refinement. So we are looking at every single opportunity in the marketplace that could add shareholder value or could put it strategically in a position to be in a stronger spot down the road. And if something is interesting at the right price, created without a major transition risk, we would certainly consider it. As I say, the #1 priority for the group is to get Air France in particular, but the whole group, to get the margins up as quickly as possible.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [61]

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And concerning your first point, I will say [thereby is evolution] when you correct for the strike is equal between the 2 companies to follow that answer. This is the last question. I just learned [from you] that Marie-Agnes is moving now leaving the financial communication and she will be replaced in September by [Oliver Garre], Oliver is coming from the Alliance Department and he knows about the growth network.

I am sure he will contribute positively to the [animation] of investor relation, but on your behalf if you didn't do it already to exit Marie Agnes, I think that we can thank her for her extra valuable contribution vis a vis you, vis a vis Air France concerning financial communication and financial information, et cetera, et cetera. So -- but she's moving, but she's still working with me so I am extra happy also to keep Marie Agnes close to me. Yes. So I think it is the end of the conference call and on behalf of Air France-KLM, Ben, myself and all the team, we thank you for your participation.

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Operator [62]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.